Common Stock Quotation

Common stock are traded in an active secondary market. There is introduction of stock market automation in Trading at present. Brokers have to quite price before trading in floor market. Moreover, customer profile as per requirement of SEBON has to be complied in addition to citizenship certificate number and age of the investor filled in order form entered in computer trading. Due to artificial rise in market price, NEPSE, SEBON and NRB are taking measures to save investors from being victims of price manipulation. Measures have been taken to enhance the shareholders' awareness program in addition to putting ban on margin trading for some period and continued thereafter as well as elimination of mutual trading. There is control on blank transfer of shares.
Each common stock is assigned a trading symbol. The trading symbol of above table is Com. NB. The 52 week 'Hi' and 'Lo' prices are adjusted to reflect the common stock. 'Hi' means high price of the 52 weeks and 'Lo' means lowest price of the 52 dividends, based on the year-end, semiannual or annual declaration, by the closing price. The price-earning ratio or P/E ratio is calculated by dividing the closing price by the earning per share. The trading volume, 'vol 100s' gives the number of shares traded for the day. 'Net Chg' indicates the change in price form the previous day's close.

The Secondary market
The role of secondary market is more in focus than that of primary market in securities market. It is mainly due to the fact that secondary market provides liquidity to the securities and ensures continuous price formation. The continous price formation process reduces sudden jump in the price of the securities in the market. Moreover, the operation of secondary market is also important from investors' point of view on the following grounds;
- The need for liquidity to meet sudden demands for funds due to premature payment of liabilities.
- The need to shuffle portfolio to readjust the maturity structure to realign with the current liability structure.
- The investors' decision to inform the portfolio returns by shedding some securities which are yielding lower income and going in for other securities which yield higher income.
- The need to constantly seize the opportunities available in the secondary market due to forces of demand and supply of certain securities.

Nepal Stock Exchange (NEPSE) is the only organized exchange to carry out secondary market operation of corporate securities in Nepal. The dashing leadership and internal management improvement are going on within working style of NEPSE to support automation in a stock requiring all brokers to conduct securities transactions through computer networks. Therefore, the following section describes the organization and operation of Nepal Stock Exchange Ltd.
Over-the-counter (OTC) Market
Over-the-counter market is a nebulous market made of brokers and dealers and the most important characteristic of the over-the-counter market is that the securities are not listed like that in organized stock exchange. It is popularly called as over-the-telephone market since the bulk of securities transactions are handled through the telephone. In implication, OTC is more a way to do business than it is a place. The telecommunication networks have made OTC market a loosely knit organization of brokers and dealers. In other words, most of the brokers and dealers who trade in an OTC market securities are linked by a networks of telephones, telegraphs, teletypewriters, computer system and others to deal directly with one another and with customers. In our country also, rethinking is going on to provide market for securities not listed in NEPSE. Laws and guidelines are initiated from SEBON. OTC market for de-listed securities rather it is to be understood that it is market place over communication lines derives the prices and it constitutes the main market maker in securities. OTC market performs mainly three important functions as given below;
- Providing market for outstanding securities
- Creating market for new issues
- Asking a market for secondary distributions.

Like that of listed securities in organized stock exchange, OTC market, securities traded range from the risk-free government securities to the most speculative common stocks. The OTC market is regulated by the National Association of Security Dealers (NASM). The broker dealers are also sometimes called registered representatives who are eligible to join NASD. In fact, NASD acts as a self-regulating agency for its members and put into operation the NASD Automated Quotation System (NASDAQ). As such, the nation-wide communication system networks allows brokers to know the terms currently offered and also made aware of current bid and asked prices for thousand of securities simply by pressing of the keys on a console of an electric type writer. Prices in OTC market are determined by direct negotiation between buyers and sellers through bid and asked prices. There is super dot providing electronic order routing system through member firms transmits market orders to exchange order management system. In fact under OTC, there is opening feature of super dot system.
The OTC market is not physically located in any one place. Rather it consists of a number of brokers, dealers, market makers throughout the country who are linked together through their communication network. For any individual security traded in OTC market, there will typically be a number of broker or dealer firms which make market in the security by setting competitive bid quotes to buy and ask quotes to sell the security.
Securities traded in the OTC market tend to be those of small regional business, banks, Finance companies and mutual funds. In addition most corporate and Nepal Government, bonds are traded in the OTC market. Here securities exchange center from the very beginning of its establishment started developing an over the counter market for government bonds, Initially because of the low public awareness and general participation towards these securities, it could not make such headway. However, afterward with the intensive marketing and dissemination of information and publicity took place about the investment in financial assets like bonds and government treasury bills. It broke the initial investor's resistance with the turnover of Rs.878 million transaction of government bond in 1992/93 as against Rs.372 million in 1980/81. But now a day, the scenario is totally changed. Market report reflects that demand for government security as well as bonds is in the process of development. It indicates the importance of Over-the-Counter market.

Stock Market

Common stock represents an ownership position in a corporation. By purchasing a share of a corporation, a person can become a shareholder with some degree of ownership and control over the company. Common stockholders are thus the owners of a corporation and they have certain rights and privileges. Common stock gives several rights to the stockholders. Stockholders enjoy right to attain annual shares. But, in Nepal stock market, the shareholders are avoided due to negligence of company management as well as the regulatory thrust on protection of investor's right is found to be less concerned. The existing Shareholder's Association of Nepal (SAN) is totally inactive and sleeping without raising voice to defend the shareholder's right. Even the establishment and development of a number of Investor's Forum are not found to play active role in restoring and protecting the interest of shareholders. Common stockholders have a residual claim on the assets and benefits provided by the company and the are given least preference in the distribution of earnings. It is because debt holders, creditors and preferred stockholders must be paid as scheduled before common stockholders bear the greatest risk. But they also enjoy higher return on corporate success in the form of higher dividends and capital gains.
Common stockholders are the owners of the company. Because of that ownership, rights of common stocks are as follows;

Rights of the common stockholders
Common stockholders' get rights only by virtue of making investment in the share of the company. Their rights depend on their expectations to get dividend, share in the earnings of the company and other participatory approach of exercising voting rights, discussing in agenda brought in annual general meeting and other inter-reactions. The rights of the common stockholders are follows;

Right to get dividend
Common shareholders invest in the shares of the company to exercise the rights to get dividend. If not, they raise questions in the annual general meeting to the board of directors regarding their accountability and duty in shareholders' interest.

Right to earnings
The common stockholders can make a claim on the earnings of the company although legally they cannot enforce the management to pay earnings as dividend. they can simply influence and convince the justifications to pay earnings as returns on their investment.

Right to claim on assets
The common stockholders have right to get the distribution of assets in the event of liquidations. This is possible only after meeting all the obligations of the creditors and employees claims on the company.
Right to inspect books of account
The company act has provided the right to the shareholders to see the books of account in case of their doubt on the maintainence of accounts. In practice, this is very rare exercise.
Right to attain general meeting
Shareholders have the right to participate in annual general meeting and raise the queries about the financial statement for discussions.

Right to vote
Shareholders are different from others because they have the voting rights to elect the members to serve in the capacity of directors in the board of the company. However, shareholders are not conscious to exercise their voting rights as the provide proxies instead of actively participating in enforcing their voting rights.
Responsibilities of the common stockholders
An only exercising right is not sufficient because rights become meaningful only when shareholders feel responsibilities to have good moral conduct to follow the discipline in the growth of the company. As such, shareholders cannot separate the responsibilities, which they have for the companies. The responsibilities are to cooperate with company, provide fruitful suggestions and maintain discipline. The responsibilities of the common stockholders are as follows;

Duty to cooperate
Shareholders have an important duty to cooperate with the management of the company in helping how to improve the performance of the company. Simply criticizing the company and management is not a healthy practice rather shareholders have to think positively to encourage management to enhance efficiency of the company.
Duty to suggest
Shareholders have to be constructive in providing valuable suggestion useful to the company so that the management will consider such suggestion useful as feedback to improve the performance than before.
Duty to maintain discipline
Shareholders should be obedient to maintain discipline to have good moral behaviour and code of conduct. They have to follow the norms laid down without violating the laws, rules and regulations of the company.

Duty to be vigilant
The shareholder should be self conscious to know and get information to be professionally oriented and independent in thinking and judgment.

General organization of the stock market
An organized security exchange provides a fixed place at which trading in securities is made possible. The organized securities exchange is a voluntary association that endeavors to maintain a smoothly operating market place. In other words, organized securities exchange is an auction market with price set by large number of buyers and sellers in numerous little auctions occuring daily on the floor of the exchange. In order to be a member, one has to own seat by way of membership. The board is empowered to accept or reject the membership and only the persons of sound financial position and higher public reputation are allowed to be members of the exchange. The members are usually brokers i.e., partners and directors of brokerage houses. The stringent laws of fines, suspension and expulsion discipline members. The members can submit proposals to the exchange if they have some changes to make and the exchange reserves the rights to approve such proposals. It is up to the exchange to allow or reject application for new issues listing. As such, the organizes securities exchange provide not only market places for securities but, at the same time, furnish facilities to the members to have a free, close and continuous trading in securities with little variation in securities prices.
Furthermore, the organized securities exchange provides liquidity for investors to sell their holdings at the time of emergency-funds needed and render a direct service to the industries to raise capital directly from the market. The organized securities exchange makes the determination of security prices easily within fair means through the automatic free play of the forces of demand for and supply of securities. In Nepal's context, the Nepal Stock Exchange is playing crucial role and function to develop organized securities exchange through number of studies already conducted. However, all these studies were not seriously considered for implementation due to various externally-and-internally imposed constraints. Although some attributes of organized securities exchange such as listing rules and securities transactions act has been developed, but the reality of the trading in securities reveals no buyers and sellers to conduct transactions.

Level & Structure Of Interest Rate

Interest is the cost of borrowing while the interest rate is the rate expressed as a percentage of the total sum borrowed for a stated period of time. All business organizations or individuals are responsive to interest rate of banks and financial institutions in one-way or another. Interest rate structure is the relationship between maturity and yield in order to determine bow the bond portfolio behaves in matching the maturity structure. The change in interest rate with correct adjustment influences the portfolio return. Thus, interest rate structure and its level depends upon (a) the behavior of the yield curve (b) composition of the maturity structure (c) sensitivity of the change in the interest rate and (d) default risk included in matching the level of interest rate and its relationship with the yield curve.
However, in the context of Nepal, interest rate is regulated by the central bank during the early stage of financial market development taking the period from 1955 to 1965. But, the country's central bank namely Nepal Rastra Bank gradually began to liberalize the determination of interest rate on a phase-wise basis according to compatibility, efficiency and maturity of the banks and the financial institutions that have developed in the country. But for national interest from the monetary stability view point, Nepal Rastra Bank can get in the way in guiding the banks and financial institutions to relate interest rate to economic growth.
In the early mid 1980's the country has adapted liberal economic policy. Number of finance companies and commercial banks began to develop and government made the liberal policy in maintaining the interest rate structure. Liberalization in determining market interest rate was encouraged for commercial banks, established under joint venture in association with foreign banks in private sectors.

The level of interest rate
A bond's value depends on the three important factors that include coupon rate, the market interest rate and level of interest rate. A term is the date when the repayment of the face value amount of a financial claim is due. The coupon rate is the stated rate. This will be paid annually or semiannually or quarterly as interest when the holder redeems coupons attached to the bond at specified period of time.In Nepal also, Nepal Rastra Bank determines the interest rate on Government Development Bond and National Saving Certificate. In these instruments issued to the public, there is a lot of variation in interest rate in different periods depending upon the state of the economy. At present, deregulation of the interest rate as result of economic and financial liberalization has brought autonomy and determination of the level of interest rate to the banks and financial institutions guided to follow the directives of the unified Umbrella Act.
Upon maturity, the bondholder redeems the bond at the face value. The level of interest rate is the most important factor, which influences the value of bond. Therefore, every investor should know the basic factors that influence the level of interest rate and changes from one level of interest rate to another level of interest rate. Various theories have been developed to examine why interest rates are high, low rising or falling. Fisher classical theory is one of them. In 1930, Irving Fisher found that normal interest rates tend to rise and fall in relation to the rate of inflation.
However, in economic perspective, the theory of interest rate determination focuses on general level of interest rate in an economy showing the relationship between borrowers and lenders. The decision on saving and borrowing is guided by the popular Fisher's Theory under a classical approach based on marginal rate of time preference for consumption. The saving and investment comes in equilibrium through interest rate determination. Saving decision is income while investment means directing savings to increase firm's capacity to produce. But, in this regard, marginal productivity of capital is negatively related to amount of investment. Negative relationship shows downward sloping line. As such, the firm will invest as long as marginal productivity of capital exceeds or equals the rate of interest. The equilibrium rate of interest comes from interaction of supply and demand functions where supply of savings equal total borrowing and investment. From time to time, there exists frequent results of a shift in demand for savings and supply of savings. At the same time, the loanable funds theory is expansion of Fisher's theory of interest rate to the extent that interest rate is determined by complex interacting forces to total demand for and supply of funds by firms, government, financial institutions, banks and individuals. This is due to the government deposit institutions creating money and borrowing funds.

Interest rate structure in Nepal
Interest rate charged differ in government securities, refinances of loan, commercial bank deposit and loan floated by other financial institutions in this five year period from 2002 to 2007.
In T-bills, interest rates decreased from 4.94 percent in 2002 to 3.95 percent in 2004. In National savings bond, Interest rate recorded 7.13 percent in 2004 and legal of development bond recorded 3.8 percent in 2004. Refinancing rate of NRB varied from 2 percent to 5.5 percent in 2004. During same period refinance rate against foreign
currency loan is 2 percent during same period. The deposit rate of these commercial banks varies from 2 periods to 7.5 period taking savings deposit and various time deposits of minimum 3 months to 2 years and above in 2004.
Then lending rates vary from 4 percent to 16 percent for kinds of loan offered such as industrial loan. agricultural loan, export bills, commercial loans and overdrafts. The interest rates charged by other financial institutions are from 10 percent to 10 percent. But in 2005 the Treasury bill rate is 3.94 percent and it decreases to 3.13 percent in 2006. At the same time the development bank remains at the constant rate of 6.5 percent to 13 percent. But the development bond rate varies from 3 percent to 8 percent. The refinance rate of the Nepal Rastra Bank decreases to 1.5 percent to 6 percent in 2006. The deposit rate of commercial bank for 3 months to 2 years is 2 to 5 percent in 2006. While a lending rate is 8.25 percent to 13.5 percent in case of industry, agriculture, commercial loans and overdraft. But for other financial institutions the interest rate varies from 10.5 percent to 13.5 percent.
The percent per annual interest rate has varied from 3.13 to 2.13 percent in T-bills during 2007 and national savings, it has decreased to 8.15 percent and development bonds provide the maximum interest rate 6.75 percent. The refinancing rate of NRB has decreased to 3.5 percent and in case of foreign loans it comes to 3.25 percent. In case of commercial banks, interest rate on deposits increased slightly 5.5 percent although, the pressure of liquidity has raised interest rate 6 percent and maximum to 7 percent. The lending rate of commercial banks has increased to 14.4 percent. For other financial institutions the interest rate in 14 percent. At present, NRB as well as the investors are finding the interest rate provided by banks is not compatible to the market interest rate.

Investor Bankers In Nepal

Primary market is the first issue market since shares are floated for the first time by inviting the investing public to buy the shares. In the historical context, the growth of the primary market is encouraging as public investors are interested to buy the shares with greater confidence on the performance of the companies. But companies have risk in issuing the shares for not getting fully subscribed. So, they take the help of the investment bankers that play a very signifincant role in primary market to provide guarantee of funds in case of shares not fully sold. The investment bankers is that they not only provide funds but also help in advising them to sell, how to sell and where to sell for getting the success of share floation. In order to support wtih evidence regarding the role of investment banker and its relationship with regulating authority, the following information prove that validity.

Investment bankers, who assist individuals needing funds by locating individuals wanting to invest funds, usually handle security issued in the primary market. It should be noted that investment banker sometimes offer for sale large blocks of already outstanding stock in what is known as secondary distribution. Investment bankers may act either as agents or as principals in any given transactions. If an investment banker actually purchases the issue, form the firm and attempts to resell it. In this instance, the investment banker guarantees that the selling firm will receive the proceed of the sale after the investment banker's fee and expenses. The investor banker in this principal transaction is often called an underwriter.
When an investment banker acts only as an agent, the transaction is calle a 'best efforts' offering. The investment banker doesn't take title to the issue as occurs in the standard form of underwriting, but only agrees with the firms issuing the securities to give the best possible effort in marketing the securities. The investment bankers invest efforts offering doesn't stand to lose any risk capital. He can act merely as agent of the transactions without taking any risk of handing the loses that may araise from such transactions. Thus, in an agent transaction, the investment banker plays the role of a third party to facilitate the transactions between two parties. There is no capital at risks since investment banker doesn't promise to sell securities with guarantee but simply assures his best efforts to sell as much as possible. At other side of the coin, the ability to serve as a principal implies the responsibility accepted by the investment bankers to sell securities with guarantee. Viewed thus, in principal transaction the investment banker involves his capital and taking the risk associated with such transactions. Failure to sell securities puts financial burden on investment banker to takeover all unsold securities by himself.

Primary market in Nepal can be analyzed with the context of legal provisions regarding the procedure of new securities and the institutional framework. The current securities legislation are the Securities Exchange Act, 1983; Securities Exchange Regulation, 1993; Membership Of Capital Stock Exchange and Transaction by E-laws, 1998; Securities Listing by E-laws,1996; Issue Management Guidelines, 1997; Securities Allotment Guidelines, 1994 and Securities Registration and Issue Approval Guidelines, 2000. The other related Acts are the Company Act, 1997; Insurance Act, 1992; Commercial Bank Act, 1974; Finance Companies Act, 1986; Foreign Exchange (Regulation) Act, 1962; and Foreign Investment and Technology Transfer Act, 1992.

Compliance of the primary market issues
Primary issue of the securities in the market is regulated by the two acts; One is the Company Act, 2062 with amendments and other is the New Securities Exchange Ordinance Act, 2063 with amendments. Both of these Acts provide necessary compliance requirements for the primary issues to get approval for selling the new issues to the public. The issue manager has to take Due Diligence Certificate to be eligible for the issue of new securities in the market.

Operating Practice of Primary market
The primary market is operated by the issue managers in which the issuing company has to consider all the necessary legal requirements for the issue. So, in Nepalese capital market also, there are network to operate primary market with the help of 8-issue managers and 2-primary market dealers totaling 10-issue managers.
The issued approval by SEBON recorded 5 companies that include 2 commercial banks and 3 financial banks that include the issues of securities worth of Rs.390.5 million in 2056. However, the prospects approvals after registration of securities consist of 15 companies that include the total value of 915.92 million but the right shares issues consist of 14 companies having the total value of Rs.1241.45 million. This is how the primary market has grown remarkably in 2005/06 due to investor's optimistic confidence in the performance of the stock market. Moreover, discontinuity of the investors' confidence has boosted the primary market to constable extent with success of flotation of the shares by number of companies in the primary market. During this period, the SEBON has registered capital mobilization of Rs.4.05 billion from 20 different companies and there is, however, major right shares of the companies.
Moreover, the issue managers engaged in the primary market has to fulfill the norms lay down by securities board of Nepal. Every new issue managers is required to submit annual report including profit and loss amount cash flow statement and securities trading report within 4 months of the expiry fiscal year. According to SEBON report of 2006/07, out of 9-issue managers 8 have submitted financial report and amount of issued managed very from Rs.1184.40 million from Citizen Investment Trust then followed by NIDC Capital market managing Rs.729.3 million and Nepal Merchant Banking and Finance Ltd. managing Rs.338.5 million and that of Ace Development Bank comes to Rs.530 million. But the minimun issue managed is Rs.72.5 million in case of EFINSCO. NIDC Capital Market is able to manage 11 issues, and Nepal Merchant Banking manages 10 issues.
In additional to these developments of issue managers, SEBON is institutionally strengthened through the corporate and financial governance project. The Aries Group Ltd. a consulting frim first selected for implement of that project as well as drafting regulations on securities registration and dethrone along with the development of various forms:

Form A Annual report of corporate body

Form B Quality report of corporate body

Form C Report of special event or circumstances

Form D Prospectus on corporate body

Moreover, SEBON has taken regulatory measures timely to govern the capital market. As a result, 3 new regulations have been issued that consists of Securities Business Regulation Act of 2007, Securities Regulation Act of 2007 and Stock Exchange Licensing Act of 2007. All these prucial to pave the way for opening the new stock exchange, increase the number of brokers and reduce the brokerage commission to make capital market competitive and efficient.

Primary Market

Primary market it the market for new issuers. It is the important component of the capital market. Many financial intermediaries such as merchant bankers and issue manager serve in capacity of investment bankers and underwriters. They play a major role in promotion of primary market. This is the first issue market attracts investors to invest in the shares of the issuing companies. The success of the capital market depends on primary market and this ultimately provides a basis for multiple transactions in secondary market.
Even in our country, many public limited companies have been successful enough to raise capital from primary market with over whelming confidence of investors on the performance of the companies. At present, the loan facility provided by many financial institutions with certain percentage of margin money on loan to investor have bought over subscription of shares in primary market. This has created risk from the primary market for which Nepal Rastra Bank is trying to control on use of trading to minimize default of the bank loan. There is also a control on use of foreign passport in primary market applications from banks. SEBON has already informed investors about the non-professional players in the market and thinking them to control gradually. As a result, BON has taken various measures after automation in stock trading requiring investors to provide full descriptions of the status and filling the other timely by attaching date of birth and citizenship certification number. Warning has been issued for public notice not to use others citizenship certificate in buying the shares in primary market to avoid misuse of investors' rights.

The Primary Market: Size and scope
Primary market is the market for new issue of securities. Securities are issued for the first time in the market to raise funds to serve the specific purpose. The government, companies, business firms and industries tap the needed funds from the market issue these securities. Sometimes, the responsibility to manage the new issue is entrusted to the security dealers and underwriter of securities under different terms and conditions of the issues. To issue securities in the primary market, a company in Nepal, should follow company Act. The Act has briefly specified the process of issuing prospectus. This is a legal document containing the various financial corporate and business information that will help investors make rational investment decisions. Moreover, the various guidelines developed by SEBON have to be followed and issue managers have to obtain Due Diligence Certificate in dealing in the primary market issues.

Size of the primary market
The volume of transactions conducted on the primary market determines the size of the market cannot make the primary market viable because the costs of the transactions not only in terms of commissions but also the logistic support including administrative costs should justiry the size of the market. In advanced countries, primary market became efficient and successful due to satisfactory and optimal size ot the market. In Nepal, the size of the primary market is still considered to be small although it is increasing at present.
Having stated and explained about the size of the primary market, it is also important to know the scope of the primary market. There is great scope for primary market since resource mobilization in the economy for the development of the companies is not possible without the presence of the primary market. Even the development of the secondary market cannot take place without primary market. The primary market has a greater scope for financing the new projects, providing investing opportunities to the investing public for better growth with the help of primary market. Even infrastructure of the economy like development of hydro-electric project and service sectors come from the financial support of the primary market.
The process of issuing securities
Process of issuing new securities describes the process by which a corporate issuer organization brings new securities to the market. Financial manager should develop the good relationship with an investment banker. Investment bankers have to follow the various steps in completing the process of issuing securities because it is to be made systematic for efficient issuing of securities. The various steps to be followed in the issue of securities are explained below:

Originating the securities
Investment bankers are the originators in the issuing of securities. They take initiations to advise how to sell securities to the issuing company. They provide the signals of success or failure in the management of new issues to the issuers. Their counseling is important in the origination of securities issues. They provide advice regarding issue price, volume of issue and timing of issues.
Underwriting the securities
Another important step, which the investor bankers have to consider, is the underwriting the securities. For this, they develop different modalities like underwriting through Best effort selling, stand by agreement and guarantee of the issues. In Best effort selling, underwriting do not guarantee of issue simply provide assurance of selling to the best of his effort. In case of stand by agreement, the issuers sell the shares but the underwriter agrees to undertake all unsold portions. The underwriter provide guarantee to the issue by taking risk by himself for which he charges underwriting fee.
Formation of syndicate
The underwriter forms the syndicate in which he becomes a lead investment banker and there is other selling group participating in issue according to their quotas allotted in the given region. The syndicate is dissolved once the purpose of issue is fulfilled.

Risk diversification
Investment banker may not take all the risks of issue if the size of transactions is beyond his financial limit. In such situation, he will diversify the risk through the help of other investment bankers to share the risk of issue because they have got the networks to minimize the risk.
Distribution of securities
Investment bankers have developed infrastructure and the networks to distribute the securities on a wider scale. They can manage to distribute the securities efficiently because of their connections and networks with various organizations and the areas making it easy to distribute the securities quickly and efficiently.

Stabilization of the stock market
The responsibility of investment bankers does not end just after distribution of securities. He has added responsibility to maintain secondary stock market to purchase the shares if there excess supply and make the shares available if there is excess demand. This is how they are champions in stabilization of the stock prices. They are capable to develop and maintain strong secondary market for future issues.

Efficiency Of Capital Market

There is no denying the fact that capital market is the backbone of a national economy. It is because the efficient functioning and smooth operation of capital market tends to bring rational allocation of resources to enhance the productive capacity of the economy. Assets are properly built up through best utilization of collected funds from capital market. The overall impact is the better channelisation of funds to business, trade, industry and other service industries. At present, emphasis is given to the growth of the real sector otherwise the capital market cannot cope the problems of economic growth in the long-run. There is tremendous decline in the market capitalization of the real sector while looking to the stock exchange.
On the whole, the development of capital market in our country is trying to generate efficiency through the basic cannons of creating fair competition among market practitioners, confidence of market participants, and adequate and true liquidity, productive asset transformation effects and transparent regulation and timely release of market information to market participants (Securities Board, Nepal 1998-2002). These are meaningful objectives of capital market development in the country. But, how far these will be implemented to make capital market efficiency is still to be seen in years to come.
But, it conceptual term, efficient capital market implies the full reflection of information on security prices. In a efficient market, changes in information about the prospects for a given security are quickly reflected in security prices. Favorable information about the security will cause an immediate price rise and unfavorable information tends to produce an immediate decline in stock prices. As such, capital market to be efficient requires security prices to reveal all available public information about the economy, financial market, and all about the specific company involved. The general belief is that market prices of various individual securities adjust automatically and very rapidly to any flow of new information.
In reality, however according to random walks theory, the general assumption is that changes in price will not follow any pattern. New information can lead to a change in the intrinsic value of a security but subsequent security price movement doesn't follow same expected impact. It means the past security prices can't be used as a guide to predict future prices since in efficient market security, price gets already adjusted. But how far these theory of random walk applies in the country's growing stock is applicable is doubtful. This is because, still investors make decision on the basis of strong past performance fundamentals and in some cases, depending on the false information released by bellow-the-average professional standard market participants.
Like money market, capital is also an important ingredient of the nation's financial system. The smooth and systematic growth of capital market helps students and all those engaged in the business of finance to understand how market participants such as the government, individuals and institutions raise funds to meet financial requirements to finance the various development projects of greater national importance and priorities. Because of the difficulties involved in the matching of timely cash flows, they have to depend on capital market in raising the funds whenever needed and supplying the funds whenever they have enough funds at their disposal. As for instance, government issue bonds and other long-term securities to support the budget deficits. It is because the expected revenues are not keeping in pace to meet all the costs of development projects.
At other time, government has to undertake turnkey projects that are beyond the reach of private sectors. So, government has to raise long-term funds by selling treasury bonds, development bonds and in such a case, government becomes the borrower in the capital market. At other time when government doesn't need funds for the long-term perspective of the economic development, long-term securities are bought to usually flush with funds to become the lender in the capital market. In such situation, government may also make investment in attractive long-term financial assets to increase revenue.
Likewise, business firms have to enter capital market as they face difficulties to meet long-term capital needs to finance huge investment projects. In such a situation, when the retained earnings or ploughed back profits are not sufficient to exploit new potential investment opportunities, they have to go to capital market to raise funds by issuing shares to the common stock investors that include both individual investors and institutional investors.
Take the case of Nepal, the new promising hotel- Oriental Hotel Limited under the brand name of Radisson Hotel, Kathmandu has been successful to float shares of Rs.12.5 million to the public. And there had been more than 6 times over-subscriptions indicating higher public confidence on the management of this hotel by Radisson Group. This is the second to the earlier over-subscriptions record of Tara Gaun Regency Hotel. Thus funds have been raised to repay the loan and cover part of the business expenses. Despite that in experience the actual timing of cash receives and disbursement will not be so easy to maintain for this hotel. But, these companies couldn't meet expectations of the share holders and market values of the shares of hotels are declining below the par value. Due to boom in capital market, primary issues of companies like Gorkha Development Bank, Sanima Development Bank, Himchuli Development Bank, NEPSE Financial Institutions Market, Financial Institution, Nepal Express Financial Institutions, Infrastructure Development Bank, Kuber Merchant Financial Institutions, Prabhu Financial Institutions, IME Financial Institutions, etc. have provided ample scope for the growth of scripts for trading in the secondary market.
As such, when business firms have cash shortages, they raise funds from capital market by issuing shares through the net works of financial intermediaries engaged at present capital market. They become the fund-raisers from the capital market to meet the permanent financing of the long term potential as well as beneficial projects. But, how far they can ensure return to the investors prove simply optimistic projection in prospectus as the regulating authority like Securities Board has no better professional manpower to evaluate the information stated in prospectus to safe guard investors.
At the same time, Business firms when they have adequate funds surplus because of their ability to earn more than necessary, they become the lenders in the capital market. But in Nepal, business firms have not developed to such an extent to play both the role of fund-raisers and investors or lenders in capital market.

Capital Market

Capital market constitutes an important part of the financial market. It relates to those markets from where government, households, firms and industries secure long-term capital needs through the use of a wide variety of long-term financial instrument and other securities. It is the market for those financial instruments that are brought and sold with maturities greater than one year. Thus, capital markets are for longer-term debt instruments and stocks. Capital market securities include such marketable debt securities with maturities of a year or more and equity securities. Most of associated markets come under the scope of capital market.
In fact, capital market deals with longer-term and relatively riskier securities. Treasury bonds are an example of capital market just as Treasury Bills are an example of money market. All those who need longer-term funds depend on capital market. As for instance, government goes very often in capital market by selling long-term claims on their state-owned enterprises and industries issue shares and other securities to meet operating funds. Likewise, business and industries issue shares and other securities to raise funds from capital market. Households sell and buy long term claims to meet the very purpose of residential mortgage financing. Thus capital markets help in transfer of funds from savers to borrowers and secondary capital market allows investors and financial institutions to alter the liquidity, risk and portfolio composition in one way or the other.
The range of participants in capital market is much wider and participants create financial instruments that will fit the requirements of special cases- a kind of market for in tailor-made financial instruments. Developers called capital market as creative finance while others called it as finance facilitating and service center.
In the context of Nepal, capital market is slowly growing as well as improving. Growth of capital market has made it possible for the public limited companies to raise the long-term capital by issuing shares and other industrial bonds to the investing public. In this regard, SEBOPN has been active enough to promote capital market both in primary market and secondary markets transactions.
SEBON has allowed primary issues of Rs.2295.5 million in 2006/07 for 34 companies. Market capitalization has recorded Rs.186.3 billion in secondary market.
In fact, public confidence has grown very positive. There is a record of over subscription, as the shares floated by every company became a success. The projected results in prospectus continue to become a strong document of public belief. It means investing public attracted to invest in shares with the trust that promoters managing company will generate return sufficient to meet the expectations of investors. This is how capital market has taken a very optimistic outlook. But things change afterward as many of the manufacturing public limited companies like Jyoti Spinning Mill, Gorakhkali Rubber, Butal Dhago, Indreyani Soyabean, Kathmandu Distillery, etc.,could not flourish in a manner consistent with the needs of investors. But, there are also success cases relating to government banks, finance companies, insurance companies and few manufacturing and service industries.
On the whole, capital market is proving very significant to enhance the country's financial sector development. This is in coincidence to the government's financial sector reform policy supported by World Bank, Asian Development Bank, and other donors in addition to the vital role played by the regulating authorities like Nepal Rastra Bank, etc. At present, capital market is proving to be strong aspect of financial market in the country in view of continued revival of the public confidence for bringing significant rise in share price.
In Nepal, the growth of primary market and secondary market due to active involvement of issue managers, investment bankers and commission brokers brought a significant impact on capital market, as per available date in 2006/07. Primary issues have mobilized funds amounting to Rs.2753.7 million that consists of 34 companies. At the same time, secondary market has been created since the market capitalization has grown to Rs.186.3 billion raising NEPSE index to 683.95 points.

Role Of Capital Market
The nature and role of capital market is growing in scope and coverage in the financial system of every nation. It is mainly because capital market is much more diverse than those found in money market. It makes it possible for the transfer of funds to enhance economic growth and capital formation. As such the role of capital market is to channel savings for investment in order to enhance economic growth. To be specific, the role of the capital market can be better explain in order of following points;
Long-term productive and income generating assets
Capital market has important role to play by creating a market for capital fund. This helps in use of capital funds in business enterprises undertaking significant projects of greater national importance. As such, capital market provides a basis for enhancing investment in long-term productive and income generating assets.

Healthy economic activities
Capital market is an active agent of promoting healthy economic activities necessary for raising the living standard of the people. This is in coincidence to generate income for savings and there by investing in economic activities that helps in employment generation and the income creations of the people.
Profitability of the business enterprises
Capital market is the basic avenue for raising funds to use in promotion of business activities that ultimately enhance the profitability of the business enterprises. It is because of capital market business activities is in a position to finance big, project and expand the size of the business.
Viable mechanism for funding
Capital market has a significant impact on the funding of the business enterprises as it helps in the promotion, development and operation of such enterprises. It is because of capital market, business enterprises have assessed to funds at low cost without inconvenience.
However, in the context of Nepal, the capital market despite considered to be a viable mechanism (securities Exchange Center Limited, 1991) for company and industrial finance in the country is proving not effective. Even then, capital market has made it possible for number of companies to raise the required capital to finance the multi-million project managed under public limited companies.

Money Market

Money market is an important ingredient of the financial market. The market for short-term securities is known as the money market. It deals with those debt instruments and other financial instruments that are issued with maturity of one year or less.In the financial market, money market is proving very significant. Money market instruments cover short-term, marketable, liquid, low-risk debt securities. Sometimes money market instruments are called just cash-equivalents. In Nepal, bridge financing is a kind of money market instrument that can be used. Money market provides a channel for the exchange of financial assets for money. Loan is made available to meet purely short-term cash needs of the firm and institutions on current account rather than on the capital account. Money market serves the purpose of meeting the short-term cash requirements of the companies, individual households, financial institutions and government as well as it helps in providing investment outlets for all those having surplus funds to invest in promising securities less than one year of maturity. It is thus best for making effective use of the idle funds on a temporary basis.
There is no denying the fact that money market is slowly growing in our country. It is because money market has been able to meet the temporary short term credit needs of the government although companies and firms have not yet been able to capture the importance of money market due to failure to infuse credit worthiness of short-term market instruments in the country.

International Money Market
International money market is proving very significant fro international perspective. The flow of funds across the national boundaries through the medium of international money market is an accepted reality. Computer revolution and modern developments of software has made the world small in a way that financial transactions can be undertaken through the communications networks and other interconnections and linkages with old money market system. As this being the case, a wide variety of short-term and medium-term money market instruments have come into use for serving the needs of international investors.
Different types of loans are found to dominate the functioning pattern and usual transactions in international money market. These has not only enhanced the size of the market but at the same time infuencing the composition and constitution of the international money market. Among all, the most widely used instruments in international money market are syndicated loans and Euro-commercial papers. Syndicated loan is a loan made by the consortium of banks to a single borrower and it is priced as a spread above LIBOR (London Inter-Bank Offered Rate). LIBOR is the rate that banks participating in international debt market charge to each other for short-term loan. In most cases, floating rate is applied to reflect the current LIBOR.
Another instrument used in international money market is the Euro-commercial paper usually denominated in dollars. Euro-commercial paper has been crowding out the syndicated loans because the industrial firms in international money market have credit ratings better than those rated by banks. In international money market, there also exist Note-issuance facilities that are a form of medium term lending through a variety of instruments at floating rate notes. Banks buy thge borrower's notes or feds funds to the borrower. Moreover, international money market provides both committed and back-up facilities to making the loans as promised to the borrower. There is a case of back-up facilities that involve uncommitted back-up facilities that involve only an expressed intention but no commitment to lend under specific circumstances.


Money Market In Nepal
The money market is founded on the large amounts of funds, in which companies, banks and other financial institutions wish to hold in highly liquid form to meet short-term fluctuations in their finance. Generally, the money market is divisible under two sector - organised and unorganised. The organised market comprises Nepal Rastra Bank - the central bank and commercial banks. It is called organised because the activities of commercial banks are systematically co-ordinated by the central bank. The unorganised because Nepal Rastra bank does not systematically co-ordinate the activities of these indigenous bankers and moneylenders.
Nepalese money market is not well developed in terms of securities dealt with and institutions that deal completely in money market instruments are absent. Similarly, many of the instruments which are popular in developed money market like commercial paper, bankers' acceptances, have not yet entered the nepalese money market. Therefore the institutions that operate in the money market in Nepal are basically Nepal Rastra Bank and commercial banks and instruments dealt are treasury bills, commercial bills and short-term bank loan.
Treasury bill market is a major component of money market in Nepal, started in the year 1961-62. since then, it has been an important source of short-term fund for the government except for few years taking from 1968 to 1974. But, because of low yield and absence of active secondary market with brokers, it remained mostly at the hand of the central bank.
Commercial banks are major borrowers and lenders in the short-term money market. Although, commercial banks have been dealing with commercial bnills since long, the bill market has its position as underdeveloped in Nepal. Only a small amout of commercial banks' lending is against export and domenstic bills and larger amount is invested in import bills and LCs and the purchase of export bills.
Besides treasury and commercial bills, short-term credit by commercial banks also forms another important part of money market in Nepal. Though short-term credit has not fully developed to encourage growth of money market in Nepal, even then it has been the convenient vehicle for lending and borrowings. This type of finance was largely on the monopoly of commercial banks in the past but in recent years, NIDC and other development banks also provide such finance.
In Nepal, money market is in initial phase. It is underdeveloped in terms of securities dealt with and institutions involved in the market. Many money market instruments and institutions are still absent in Nepal. Treasury bill market and short-term credit by commercial bill market is evolving steadily despite numerous setbacks.