CHAPTER - I

INTRODUCTION
1.1 Background of the Stud
Capital market plays a vital role in the developing nation's economy. The primary share
market is the market for new issue of securities. It is the media through which new
financial assets are issued or generated. This is the first issue market that attracts
investors to invest in the shares of the issue companies. The success of the capital market
depends on primary market and this ultimately provides a basis for multiple transactions
in secondary market. After securities have been purchased from the primary market, they
can be traded in the secondary market. The secondary market comprises the organized
security echanges and a specialist facilitates the transaction. The ma!or of all capital
market transaction occur in the secondary markets. The proceeds from sale of securities
in the secondary markets do not go to the organizational issuer instead to the initial
owners "sellers# of the securities. $epal %tock &change 'imited "$&(%&# is only the
secondary market in $epal.
The ma!or function of the stock market is to provide steady and continuous market
purchase and sale of securities at a competitive price by importing marketability and
li)uidity. It is also a medium through which scattered saving and scares resources and
transferred into productive areas that ultimately help to the economic development and
industrialization of the country.
Initial public offering "I(*# occurs when a security is sold to the general public for the
first time, with the epectation that a li)uid market will develop. An I(* can be of any
debt or e)uity security. +ost companies start out by raising e)uity capital form a small
number of investors, with no li)uid market eisting if these investors wish to sell their
stock. If a company prospers and needs additional e)uity capital, at some point the firm
generally finds it desirable to ,go public, by selling stock to a large number of diversified
investors. *nce the stock is publicly traded, this enhanced li)uidity allows the company
to raise capital on more favourable terms than if it had to compensate investors for the
lack of li)uidity associated with a privately held company. &isting shareholders can sell
1
their shares in open-market transactions. .ith these benefits, however, come costs. In
particular, there are certain ongoing costs associated with the need to supply information
on a regular basis to investors and regulators for publicly traded firms. /urthermore,
there are substantial one-time costs associated with initial public offering that can be
categorized as direct and indirect costs. The direct costs include the legal, auditing, and
underwriting fees. The indirect costs are the management time and effort devoted to
conducting the offering, and the dilution associated with selling shares at an offering price
that is, on average, below the price prevailing in the market shortly after the I(*. These
direct and indirect costs affect the cost of capital for firms going public.
In $epal the first public issue of ordinary shares took place more than 01 years back with
the public issue of 2iratnagar 3ute +ills and $epal 2ank 'imited. in 4567 A.8. 2ut the
development of capital market started in 4579 A.8., after the establishment of %ecurity
&change Centre with the ob!ective of facilitating and promoting the capital market in
$epal. It was the only capital market institution, which undertook the !ob of brokering,
underwriting and managing public issue, market making for government bonds and other
financial services. %ecurities &change Centre dealt in the securities as a broker as a
broker as well as a regulatory body. The Centre used to take: buy and sale only on orders
from interested investors and confirm them if a price and )uantity matched. There was no
time limit within which a deal took place. It normally took one day to three weeks. 8ue
to this, general public faced problems while buying selling shares.
The %ecurity &change Centre issued 9; companies' shares from the year of its inception
to 4555 A 8. Among these ;6 companies were undersubscribed including $epal +ed.
'td., $irmod (harmaceuticals 'td, <arisiddi 2rick and Tile 'td., <imgiri Tetile 'td,
2answari 'eather and %hoes /actory 'td., $epal Awas 2ikash 2itta Company 'td., and
=eti /inance Co. 'td. etc. Although the secondary market was non-functional and public
were not fully aware of on the working of the capital market. The public response to the
new issue of shares of selected companies like bank and finance companies were
overwhelming.
%ecurity &change Centre was converted into %tock &change 'imited in 455>, and
under its support, the broker system of secondary market was establishes. ?ntil
8ecember ;115, out of 6; brokerage firms, ;6 firms are doing their !ob regularly. $epal
2
%tock &change 'imited is a non profit organization. It operates under %ecurity
&change Act 45@6. The basic ob!ective of the $epal %tock &change 'imited is to
impart free marketability and li)uidity to the government bonds and corporate securities.
.ith the establishment of full fledged %tock &change, the shares, which the public had
held for decades, become li)uid.
Capital market is gaining business attention since last few years. The $&(%& inde,
which shows the stock price trend of all the listed securities in the stock market, has been
increasing in the recent fiscal years. <ence, the general investors are very keen to make
investment in the securities of the companies, through both primary and secondary
markets. In primary market, the investment is made through public issues of ordinary
shares, preference shares, debentures and right shares as well as mutual fund and units
scheme.
The study focuses on the response towards public offering by investors. It is also based
on the dealing process of primary market. It also focuses on what investors want in I(*
before they invest their sector performance, knowledge, ultimate goal for investment,
sources of information etc.
1.! State"ent of the Pro#$e"
$epalese capital market is very small in comparison with other developed stock markets.
There are a few numbers of brokers, limited number of listed companies, very few
transactions and most importantly investors are unknown about the pros and cons of the
stock market. If there occur a single malpractice in the functioning of securities market,
the whole capital market may damage the national economy badly and if once the
investors confidence were lost it would very difficult to bring it in original condition.
There are various types of obstacles eisting initial public offering stages in $epal. In
developed country, generally people are aware from public offering. <owever, in
developing country like $epal Initial (ublic *ffering is still new phenomenon. +ore
than 01 percent people are still uneducated. They do not know what public offering is.
.hy should they invest their money in %tockA
3
Therefore, many problems are found in the field of public offering in $epalese stock
market rather than other developed countries.
In the current situation single investor can apply hundreds of application showing dummy
names. As a result they can capture large number of shares. .hen a single investor
captures large number of share, he can influence the company management and stock
price too.
2esides these, there are other factors, which slow down the pace of stock market growth
in $epal. They areB
?nfavourable macroeconomic conditions,
(olitical instability,
?nconfident investors,
.eak ta system and slow privatization process,
'ack of institutional investors,
'ack of trained and )ualified manpower,
Insufficient knowledge of investors about the security market.
1.% O#&ect'(e of the Stud
The ma!or ob!ective of the study is to focus on the public response to the initial offerings
or primary issues of shares in $epal. The specific ob!ectives areB
To analyze the current situation of primary market issues
To analyze the sectoral growth of primary market
To analyze the investor response to initial public offering
1.) S'gn'f'cance of Stud
This study is being undertaken to evaluate the problem and prospect to $epalese primary
share market. %tock market recognizes the situation of countries. .hen stock market is
booming, the economy is good and when market is declining, the economy is bad. I(* is
one of the crucial factors in every organization and initial public offering decision is one
4
of the most important decisions. This study might serve to be crucial information for
these respective institutions taken as sample for the study in I(* procedure. This
research will be significant for the following wayB
In $epal, there is still lack of study about initial public offering. Therefore,
this study is epected to helpful for the general investor and the
organizations that directly or indirectly related in Initial (ublic *ffering.
This study may assist to formulate the policy. It may able to know the reasons
for inconstant fluctuation Initial (ublic *ffering in $epal. It also helps to
find out the financial status of publicly going companies. /rom this
research, policy makers will get the knowledge of practical eisting rules
and regulation.
1.* +'"'tat'on, of the Stud

The study is carried out for the partial fulfilment of +aster in 2usiness %tudies
programme of Tribhuvan ?niversity. It focuses to analyze certain aspects of primary
share market in $epal. %tudies and references are limited in the perspective of $epalese
capital market. Time and resources are also constrain during the study. The other
limitations areB
2asically, data are taken from secondary %ources. Therefore, the accuracy of
research depends upon its reliability.
The data are used only up to the fiscal year ;117C1@.
Dariations of data in itself are also found when comparing with different
sources.
+any factors affect the Initial (ublic *ffering process though it is not possible
to study all factors, this study will be limited to the study of only following
factorsB
Issuing company,
Issue managers,
Eovernment body and
5
'egal provisions are analyzed.
1.* Organ'-at'on of the Stud.
The study organized into five chapters, each devoted to some aspect of the study of initial
public offering followed by financial institutions in $epal. The fields of each of these
chapters are as followsB
Cha/ter I
Contains the introductory part of the study, this chapter describes the general background
of the study, statement of the problem, ob!ective of the study, significance of the study,
limitation of the study and organization of the study.
Cha/ter II
This chapter is devoted to theoretical analysis and brief review of related and pertinent
literature available. It includes a discussion on the conceptual framework and review of
the ma!or studies.
Cha/ter III
This chapter describes the research methodology employed in the study. This deals with
the nature and sources of data, list of the selected companies, the model of analysis,
meaning and definition of statistical tools.
Cha/ter I0
This chapter deals with the presentation and analysis of both primary and secondary data
by using mathematical and nonmathematical tools and it deals with ma!or finding of the
study.
Cha/ter 0
This chapter states summary, conclusion, and ma!or finding of the study. The
bibliography and annees are incorporated at the end of the study.
6
CHAPTERII
REVIEW OF LITERATURE
Introduction
Literature review is basically a Stock Taking of available literature
in ones el! of researc"# T"e literature survey$ t"us$ %rovi!es us wit"
t"e knowle!ge of t"e status of t"eir el! of researc"# T"erefore$ t"is
c"a%ter "as its own i&%ortance in t"e stu!y '(ot"ari$ 1))*+ 1*,#
T"is c"a%ter inclu!es t"e review of %revious stu!ies$ articles$ an!
conce%tual fra&ework for t"e relate! stu!ies# To %resent t"e real
fra&ework of t"e stu!y$ &ere analysis is not enoug" an! review of
so&e relate! &aterials s"oul! be !ealt wit" to give t"e researc" a
clear vision# (nowle!ge of %ast stu!y %rovi!es foun!ation to t"e
%resent stu!y# T"is c"a%ter is &ainly !ivi!e! into two %arts like
conce%tual fra&ework an! review of relate! stu!ies#
2.1 Conceptual Frae!or"
2.1.1 Hi#torical $ac"%round o& Capital 'ar"et in (epal
-lotation of s"are by .iratnagar /ute 0ills Lt!# in 1)31 was t"e rst
%ublic issue in 2e%al# 2e%al .ank Lt!# an! &any ot"er co&%anies
also issue! s"are to %ublic !uring t"at %erio!# T"e "istory of
securities &arket t"us goes back to al&ost seventy years$ but t"e
actual !evelo%&ent of t"e &arket took &o&entu& only after t"e
restoration of &ulti%arty !e&ocracy in t"e country in 1))*# 3owever$
t"e intro!uction of t"e 4o&%any 5ct in 1)64 an! t"e rst issuance of
6overn&ent .on! in 1)64 were so&e ste%s taken towar!s !evelo%ing
securities &arket !uring 1)6*s# 7ne of t"e signicant !evelo%&ents
1
relating to ca%ital &arket was t"e establis"&ent of Securities
89c"ange 4entre Lt!# in 1)16#
T"e &ain ob:ectives of establis"ing Securities 89c"ange 4entre was to
%ro&ote an! facilitate t"e growt" of ca%ita &arkets in 2e%al# -or
about seventeen years$ it was t"e only ca%ital &arket institution
un!ertaking t"e :ob of brokering$ un!erwriting$ &anaging %ublic
issues$ &arket &aking for govern&ent bon!s an! ot"er nancial
services#
2.1.2 Financial 'ar"et
-inancial 0arkets %rovi!e a foru& in w"ic" su%%liers of loans an!
invest&ents can transact business !irectly# T"e loans an! invest&ents
of institutions are &a!e wit"out t"e !irect knowle!ge of t"e su%%liers
of fun!s 'savers,$ su%%liers in t"e nancial &arkets know w"ere t"eir
fun!s are being lent or investe!# T"e two keys of nancial &arkets
are t"e &oney an! t"e ca%ital &arket# Transactions in s"ort ter&
!ebt instru&ents$ or &arketable securities$ take %lace in t"e &oney
&arket# Long ter& securities 'bon!s an! stocks, are tra!e! in t"e
ca%ital &arket '6it&an$ 1);;+3*,#
2.1.) 'one* 'ar"et
0oney &arket activities inclu!e %ri&ary an! secon!ary &arket
activities in s"ort<ter& negotiable instru&ents suc" as Treasury .ills$
6overn&ent .on!s$ 4erticates of =e%osit$ .anker>s 5cce%tances an!
4o&&ercial ?a%er or ?ro&issory 2otes# 0erc"ant bankers are
usually users an! &arket<&akers '!ealers,$ rat"er t"an brokers in
t"ese ty%es of %a%er#
@n t"eory$ t"e &oney &arket is !iAerent fro& t"e ca%ital &arket# @n
%ractice$ "owever$ in &ost countries wit" eAicient nancial &arkets
't"at is$ t"e &oney &arket an! t"e ca%ital &arket co&bine!,$ t"e
&erc"ant banks are active in bot"# T"is is a si&%le function of t"e
;
fact t"at a negotiable &oney &arket instru&ent for all %ractical
%ur%oses is si&%ly a s"orter<ter& ca%ital &arket instru&ent#
T"erefore$ t"e tec"niBues an! facilities nee!e! to o%erate in t"e
&oney &arket are essentially t"e sa&e as t"ose nee!e! to o%erate in
t"e ca%ital &arket#
2.1.).1 'one* 'ar"et in (epal
T"e &oney &arket is foun!e! on t"e large a&ounts of fun!s$ w"ic"
co&%anies$ banks an! ot"er nancial institutions wis" to "ol! in
"ig"ly liBui! for& to &eet s"ort<ter& Cuctuations in t"eir nance#
6enerally$ t"e &oney &arket is !ivisible un!er two sectors< organiDe!
an! unorganiDe!# T"e organiDe! &arket co&%rises 2e%al Eastra .ank
't"e central bank of 2e%al, an! co&&ercial banks# @t is calle!
organiDe! because t"e activities of co&&ercial banks are
syste&atically coor!inate! by t"e central bank# T"e unorganiDe!
&arket is largely &a!e of in!igenous bankers an! &oneylen!ers# @t is
unorganiDe! because 2e%al Eastra .ank !oes not syste&atically
coor!inate t"e activities of t"ese in!igenous bankers an! &oney
len!ers#
2e%alese &oney &arket is not well !evelo%e! in ter&s of securities
!ealt wit" an! institutions involve! in t"e &arket# @nstitutions t"at
!eal co&%letely on &oney &arket instru&ents are absent# Si&ilarly$
&any of t"e instru&ents w"ic" are %o%ular in !evelo%e! &oney
&arket like co&&ercial %a%er$ an! bankers acce%tances$ "ave not yet
entere! t"e 2e%alese &oney &arket# T"erefore$ t"e institutions t"at
o%erate in t"e &oney &arket are basically 2e%al Eastra .ank an!
co&&ercial banks an! instru&ents !ealt are treasury bills$
co&&ercial bills an! s"ort<ter& bank loan#
Treasury bill &arket is a &a:or co&%onent of &oney &arket in 2e%al$
starte! in t"e year 1)61<62# Since t"en$ it "as been an i&%ortant
source of s"ort<ter& fun! for t"e govern&ent e9ce%t for few years
)
taking fro& 1)6; to 1)14# .ut$ because of low yiel! an! absence of
active secon!ary &arket wit" brokers$ it re&aine! &ostly at t"e "an!
of t"e central bank# T"e "ol!ing of Treasury bill by co&&ercial banks$
t"oug" it was counte! for t"e %ur%ose of statutory liBui! ratio$ was
uneven in t"e %ast %articularly because of low yiel!# T"e interest rate
was ve %ercent until &i!<2ove&ber 1);;# Since t"en t"e rate is
!eter&ine! t"roug" auction in t"e &arket# T"e weig"te! average
'annualiDe!, ratio on )1<!ay Treasury .ill increase! fro& 5#2 %ercent
in 1);;F;) to 1*#)3 %ercent in 1))5F)6 an! again !ecline! to 2#33
%ercent in 1));F))# @t t"en slig"tly increase! to 4#)6 %ercent in
2***F*1# Treasury bills are being "el! &ostly by co&&ercial banks#
T"e role of ot"er institutions is still insignicant in Treasury bill
&arket#
4o&&ercial banks are &a:or borrowers an! len!ers in t"e s"ort<ter&
&oney &arket# 5lt"oug"$ co&&ercial banks "ave been !ealing wit"
co&&ercial bills since long$ t"e bill &arket "as its %osition as
un!er!evelo%e! in 2e%al# 7nly a s&all a&ount of co&&ercial banks>
len!ing is against e9%ort an! !o&estic bills an! larger a&ount is
investe! in i&%ort bills an! letters of cre!its an! %urc"ase of e9%ort
bills# -or e9a&%les$ co&&ercial banks len!ing in bill nance
inclu!ing letter of cre!it were Es# 544 &illion in &i!</uly 1);*$ w"ic"
increase! to Es# 1$4*6 &illion in 1))* to Es# 11$;*2 &illion in 2**1# @t
accounte! 1)#62$ 11#)2 %ercent an! 1*#46 %ercent of t"e total loan
an! a!vances &a!e by co&&ercial banks in t"e res%ective years# T"e
!evelo%&ent of genuine bill &arket is benecial bot" to borrowers
an! to len!ers in a nu&ber of ways# -or e9a&%le$ bills are nor&ally
self<liBui!ating an! t"erefore oAer greater liBui!ity to t"e "ol!ers# To
t"e banks an! nancial institutions$ it %rovi!es "ig"er return t"an in
treasury bills$ an! for borrowers$ it costs less t"an un!er cas"<cre!it
syste&# 5 well<!evelo%e! bill &arket also "el%s in generating liBui!ity
t"roug"out t"e nancial syste&# .ut 2e%al "as long way to go to
realiDe t"e full a!vantage of bill &arket because it still lacks
1*
institutions like >!iscount "ouses> an! >acce%tance "ouse> an! tra!ers
%refer cas" cre!it for& of s"ort<ter& nancing#
.esi!es treasury an! co&&ercial bills$ s"ort<ter& cre!it by
co&&ercial banks also for&s anot"er i&%ortant %art of &oney &arket
in 2e%al# T"oug" s"ort<ter& cre!it "as not fully !evelo%e! to
encourage growt" of &oney &arket in 2e%al$ even t"en it "as been
t"e convenient ve"icle for len!ing an! borrowings# T"is ty%e of
nance was largely t"e &ono%oly of co&&ercial banks in t"e %ast but
in recent years$ 2@=4 an! ot"er !evelo%&ent banks also %rovi!e suc"
nance#
@n 2e%al$ &oney &arket is in initial %"ase# @t is un!er!evelo%e! in
ter&s of securities !ealt wit" an! institutions involve! in t"e &arket#
0any &oney &arket instru&ents an! institutions are still absent in
2e%al# Treasury bill &arket an! s"ort<ter& cre!it by co&&ercial
banks for& i&%ortant co&%onents of &oney &arket# T"e co&&ercial
bill &arket is evolving stea!ily an! slowly#
2.1.+ Capital 'ar"et
T"e ca%ital &arket is !ene! as a %lace w"ere nance is raise! by
co&%anies for &eeting t"eir reBuire&ent of fun!s for new %ro:ects$
&o!erniDation an! e9%ansion %rogra&&es$ long<ter& working ca%ital
nee!s an! for various ot"er %ur%oses# T"e ca%ital &arket &obiliDes
savings of in!ivi!uals as invest&ent in s"ares$ !ebentures$ Gnits of
&utual fun!s an! ot"er like nancial instru&ents$ w"ic" are
ulti&ately !e%loye! for %ro!uctive %ur%oses in various sectors of t"e
econo&y#
5 %lace w"ere long ter& len!ing an! borrowing takes %lace is known
as ca%ital &arket# T"e ca%ital &arket is t"e &arket for long<ter&
loans an! eBuity ca%ital# 4o&%anies an! t"e govern&ent can raise
fun!s for long<ter& invest&ents via t"e ca%ital &arket# T"e ca%ital
11
&arket inclu!es t"e stock &arket$ t"e bon! &arket$ an! t"e %ri&ary
&arket# Securities tra!ing on organiDe! ca%ital &arkets are
&onitore! by t"e govern&entH new issues are a%%rove! by aut"orities
of nancial su%ervision an! &onitore! by %artici%ating banks# 4a%ital
&arket refers to t"e links between len!ers an! borrowers of fun!s$
arranging of fun!s<transfer %rocess to seek eac" ot"er>s benet#
4a%ital &arket consists of t"e various su%%liers an! users of long ter&
nance# @t is !iAerentiate! fro& t"e &oney &arket w"ic" e&braces
s"ort<ter& nance# T"e ca%ital &arket serves as a link between
su%%liers an! users of nance# @t is a &ec"anis& for t"e &obiliDation
of %ublic savings an! c"annelling t"e& in %ro!uctive invest&ent# @n
t"is way$ an i&%ortant constituent of t"e ca%ital &arket is t"e
securities &arket# @t "as a wi!e ter& e&bracing t"e buyers an! t"e
sellers of securities an! all t"ose agencies an! institutions w"ic"
assists t"e sale an! release of cor%orate securities#
T"e ca%ital &arket is a nancial relations"i% create! by a nu&ber of
institutions an! arrange&ents t"at allows t"e su%%liers an!
!e&an!ers of long ter& fun!s$ fun!s wit"in &aturities of &ore t"an
one year to &ake transactions# @nclu!e! a&ong long ter& fun!s are
securities issue of business an! govern&ent# T"e backbone of t"e
ca%ital &arket is for&e! by t"e various securities e9c"anges t"at
%rovi!e a foru& for !ebt an! eBuity transactions# T"e s&oot"
functioning of t"e ca%ital &arket$ w"ic" is en"ance! t"roug" t"e
activities of invest&ent bankers$ is i&%ortant to t"e long run growt"
of business#
T"e ca%ital &arket also co&%rises two seg&ents I t"e new issue of
&arket t"at is co&&only known as t"e %ri&ary &arket an! t"e
secon!ary &arket w"ere alrea!y issue! securities are tra!e!# -or t"e
%ur%ose of t"is &anual$ only %ri&ary &arket woul! be !ealt in !etail#
12
2.1.+.1 Capital 'ar"et in (epal
T"e "istory of ca%ital &arket in 2e%al !ates back to t"e era of Eana
?ri&e 0inister /u!!"a S"a&s"er w"en 6un:a&an Sing"$ t"e rst
secretary of 2e%alese 8&bassy in 8nglan! returne! back to
(at"&an!u an! set u% t"e J@n!ustrial 4ouncil#J 2e%al .ank Lt!#
issue! t"e s"ares in t"e securities &arket in 1)31# T"e rst issue! of
govern&ent bon! in 1)64 was i&%ortant !evelo%&ents relating to
ca%ital &arket# T"e govern&ent rst establis"e! Securities 89c"ange
4entre 'S84, in 1)16# 5fter t"e establis"&ent of S84 un!er 4o&%any
5ct$ institutional !evelo%&ent of securities &arket in 2e%al was
starte!# @t starte! secon!ary &arket for t"e cor%orate securities in
1);4#
Securities .oar! of 2e%al 'S8.72, was establis"e! on 26 0ay 1))3
after t"e rst a&en!&ent in t"e Securities 89c"ange 5ct 1);3# 7n 16
0ay 1))3$ after eig"teen years of incor%oration$ t"e govern&ent
converte! Security 89c"ange 4entre into 2e%al Stock 89c"ange
'28?S8,# 5fter t"e conversion of S84 into 28?S8$ 25 brokers an! 5
&arket &akers were a%%ointe!# @t starte! >o%en cry out syste&> of
tra!ing t"roug" broker an! &arket &aker on 13t" /anuary 1))4#
?resently$ 28?S8 "as 23 brokers an! 1; issue &anagers# T"ere are
163 liste! co&%anies#
5lt"oug"$ t"e growt" of stock &arket is "ig"ly relative to t"e growt"
of econo&y$ t"e contribution of cor%orate sector in t"e econo&y is still
low !ue to negligible siDe of cor%orate sector# T"ere s"oul! be
auto&ation for t"e eAicient tra!ing of t"e securities in t"e security
&arket# 2e%al Stock 89c"ange s"oul! also go towar!s auto&ation#
2.1., -i.erent /et!een 'one* 'ar"et and Capital 'ar"et
$a#i# or
-i.erence
'one* 'ar"et Capital 'ar"et
1# Ti&e T"is is t"e ty%e of &arket T"is is t"e ty%e of
13
?erio!
w"ic" is &eant for a s"ort
ter& securities# 5 &oney
&arket ty%ically involves
nancial assets t"at "ave
a life s%an of one year or
less#
&arket w"ic" is &eant
for a long ter&
securities# 5 ca%ital
&arket ty%ically involves
nancial assets t"at "ave
life s%an &ore t"an 1
year#
2# LiBui!ity
T"is ty%e of &arket
involves "ig"ly liBui!#
T"is ty%e of &arket
involves less liBui! t"an
&oney &arket securities
an! !ebt#
3# Ty%es of
securities
0oney &arket !eals only
wit" !ebt securities
's"ort<ter& !ebt,#
4a%ital &arket !eals
bot" wit" stock an! !ebt
securities 'long<ter&
!ebt, stock involves bot"
co&&on stock an!
%referre! stock an! long
ter& !ebt involves
!ebenture or bon!#
4# Eisk
0oney &arket !eals wit"
low risk security#
4a%ital &arket !eals
wit" "ig" risk security#
5#
@nstru&ent
s+
0oney &arket
instru&ents inclu!es T<
bills$ co&&ercial %a%ers$
bankers acce%tance$ etc#
4a%ital &arket
instru&ents inclu!e
!ebenture 'bon!,$
co&&on stock$ an!
%referre! stock#
2.1.0 1ecurit* 'ar"et
Security &arket sets a %rice for t"e securities it tra!es an! &akes it
easy for %eo%le to tra!e t"e&# Securities &arket facilities t"e sale
an! resale of transferable securities# T"e security &arket can be
!ene! as a &ec"anis& for bringing toget"er buyer an! seller of
nancial assets to facilitate tra!ing# Securities &arket is classie!
into twoH t"e &arket in w"ic" new securities are sol! is calle! t"e
%ri&ary &arket an! t"e &arket in w"ic" e9isting securities are resol!
is calle! t"e secon!ary &arket# Secon!ary &arkets are create! by
brokers$ !ealers an! &arket &akers# .rokers bring buyer an! seller
toget"er wit" t"e&selves actually buying or sellingH !ealers set %rice
at w"ic" t"ey t"e&selves are rea!y to buy an! sell 'bi! an! ask %rice
14
res%ectively,# .roker an! !ealer co&e toget"er organiDe! &arket or
in stock e9c"ange '6it&an$ 1))2+451,#
Securities are tra!e! in a &arket calle! securities &arkets# 5lt"oug"$
securities &arkets are concerne! in few locations$ t"ey refer &ore to
&ec"anis&$ rat"er t"an to %lace$ !esigne! to facilitate t"e e9c"ange
of securities by bringing buyers an! sellers of securities toget"er# @n
ot"er wor!s$ %eo%le an! organiDations wanting to borrow &oney are
broug"t toget"er wit" t"ose "aving sur%lus fun!s in t"e securities
&arkets# Securities$ suc" as eBuities$ s"ort an! long ter& !ebt
instru&ents$ !erivatives etc are t"e %ro!ucts t"at are tra!e! in t"e
&arkets$ institutions suc" as invest&ent bankers an! security r&s$
securities issuing institutions suc" as govern&ent an! cor%orate
bo!ies an! t"e %artici%ants of t"e securities &arkets# Securities
&arkets &a:or function is to %rovi!e line between saving an!
invest&ent t"ere by facilitating t"e creation of new wealt"#
Securities &arkets covers bot" %ri&ary an! secon!ary# T"e !iAerence
between t"e two &arkets is$ t"e %ri&ary &arket consists of t"e
co&%anies &aking t"e issue of securities an! t"e &e&bers of t"e
%ublic subscribing to t"e&# K"ereas$ secon!ary &arket involves t"e
%urc"ase an! sale of securities alrea!y issue! to t"e general %ublic
an! is tra!e! in t"e stock e9c"ange# T"e %ri&ary &arket also
co&%rises t"e oAer of securities to t"e e9isting s"are"ol!ers of t"e
co&%any on rig"t basis#
T"is stu!y is only concerne! wit" initial %ublic oAerings so$ it !eals
wit" t"e %rocess an! activities incurre! in rising of fun!s fro& t"e
%ri&ary &arket# T"e o%eration of t"e secon!ary &arket$ t"oug" is an
i&%ortant o%eration sco%e of t"e &erc"ant banking$ is not covere! in
t"is &anual# ?ri&ary &arket an! t"e secon!ary &arket are %resent in
bot" t"e ca%ital &arket an! t"e &oney &arket#
15
2.1.2 T3e Priar* 'ar"et
T"e %ri&ary &arkets are &e!ia t"roug" w"ic" new nancial assets
are issue! or generate!# T"ey t"e &e!ia t"roug" w"ic" t"e !e&an!s
an! su%%liers of to!ays fun! t"e creators an! acce%tors of nancial
clai&s &eet# @n t"ese %ri&ary &arkets nancial assets are create!
an! e9c"ange! satisfying in t"e %art of nancial nee!s of bot"
!e&an!s an! su%%liers of to!ay>s fun!# @t is t"e &arket for !irect
issuance of govern&ent securities# T"e %ri&ary &arket of country is
!o&inate! by t"e govern&ent securities !ue to t"e e9istence of
insignicant new issue &arket for in!ustrial securities#
@n t"e !enition of %ri&ary &arket &a!e above an a!!ition is to be
&a!e# T"at is$ !e%en!ing u%on t"e co&%any oAering securities for
t"e rst ti&e or in succession$ %ri&ary &arket can "ave %ublic
oAerings as initial %ublic oAerings or t"e successive %ublic oAerings
or so on#
2.1.2.1 C3aracteri#tic# o& Priar* 13are 'ar"et4
4"aracteristics of %ri&ary s"are &arket are as follows+
T"e new securities are tra!e! in %ri&ary &arket#
?ri&ary &arket &akes t"e nancial ca%ital available to &ake
new invest&ents in buil!ing eBui%&ent an! stock of necessary
goo!s#
T"e transactions are less in %ri&ary &arket#
.uying security in %ri&ary &arket is less risky#
2.1.2.2 Re%ulator# o& Priar* 'ar"et in (epal
T"e regulators structure of %ri&ary &arket been s"own in t"e gure
below#
16
R e g u l a t o r o f P r i m a r y M a r k e t
I s s u e M a n a g e r N E P S E B R O K E R M a r k e t M a k e r
S E B O N N R B C R O
M O F
5&ong t"e& S8.72 is t"e &ain regulator$ w"ic" "as an active role to
regulate t"e %ri&ary &arket as well as 4E7#
2.1.5 Pu/lic O.erin%#
@t is t"e raising of long<ter& fun!s for govern&ents or cor%oration
fro& a fun! suAicient %ublic grou% in t"e %ri&ary &arket# T"e &ost
i&%ortant as%ect of %ublic oAerings is its role as t"e single &ost
eAective &eans by w"ic" govern&ent an! cor%orate entities can
obtain long<ter& '!ebt or eBuity, on a %er&anent basis# @t not only
%er&its t"e& to broa!en t"eir sources of nance beyon! t"e banking
syste& but also t"e banking syste& is usually a s"ortIter& or
&e!iu&Iter& Coating rate len!er# T"e securities &arket is often t"e
only &eans of obtaining large su&s of 9e! rate$ long<ter& fun!s#
2.1.5.1 Ad6anta%e# o& an IPO
5s !iscusse! above$ t"e %ri&ary reasons for con!ucting an @?7 are to
raise &oney an! to create liBui!ity for investors# T"ere are also
i&%ortant inci!ental benets to going %ublic# 7b:ective benets
inclu!e 'i, obtaining a rea!ily ascertainable &arket value for t"e
co&%any>s stock$ 'ii, t"e ability to &ake acBuisitions t"roug" t"e
%ay&ent of securities rat"er t"an cas"$ 'iii, greater access to
nancing t"roug" co&&ercial len!ing$ 'iv, greater access to t"e
nancial &arkets for follow<u% oAerings$ an! 'v, "eig"tene! na&e
recognition an! %restige a&ong custo&ers an! su%%liers# Less
ob:ective benets are t"e sense of success an! acco&%lis"&ent t"at
11
acco&%anies a successful @?7 an! beco&ing a %ublicly tra!e!
co&%any#
2.1.5.2 -i#ad6anta%e# o& an IPO
T"e &a:or !isa!vantage to beco&ing a %ublicly tra!e! co&%any &ay
be co&%liance wit" t"e act re%orting reBuire&ents# K"ile registering
un!er t"e act is Buite si&%le$ t"e %erio!ic an! event<base! re%orting
obligations un!er t"e act reBuire a signicant a&ount of ti&e an!
e9%ense# @n a!!ition$ t"e act obligations will co&%el !isclosure of
infor&ation t"at t"e issuer$ its !irectors$ &anage&ent an! controlling
stock"ol!ers &ig"t ot"erwise want to kee% to t"e&selves# -inancial
an! business infor&ation$ e9ecutive co&%ensation$ transactions
between t"e co&%any an! its !irectors$ &anage&ent an! &a:or
stock"ol!ers$ an! certain e&%loyee benets &ust all be !isclose! in
re%orts le! wit" t"e S84$ &aile! to t"e stock"ol!ers$ an! &a!e
available to t"e %ublic u%on reBuest# =irectors an! oAicers$ as well as
&a:or stock"ol!ers$ also &ust le re%orts wit" t"e S84 !isclosing
&ost transactions in t"e co&%any>s securities# 5lso$ t"e failure to
accurately &ake suc" re%orts &ay result in civil or cri&inal %enalties#
T"e !irect nancial costs$ inclu!ing legal$ accounting an! %rinting
fees$ of con!ucting an @?7 an! of being a %ublicly tra!e! co&%any are
substantial$ as are t"e in!irect costs of t"e ti&e reBuire! to be s%ent
on t"ese &atters by &anage&ent#
5lso$ t"e &anage&ent an! governance of a %ublicly tra!e! co&%any is
&ore !iAicult an! less Ce9ible# T"e solicitation of stock"ol!er votes
on any &atter is strictly regulate! un!er t"e act$ an! rules of t"e
e9c"ange on w"ic" t"e securities are liste! reBuire certain &atters to
be a%%rove! by stock"ol!er vote even if not ot"erwise reBuire! by
state law# 5!!itionally$ because of %ressure to raise t"e %rice of t"e
1;
co&%any>s stock$ &anage&ent &ay feel %ersua!e! to a!o%t %olicies
ai&e! at ac"ieving s"ort<ter& results rat"er t"an long<ter& goals#
2.1.5.) Tiin% o& an Initial Pu/lic O.erin%
7bviously$ not all co&%anies t"at woul! like to go %ublic are in a
%osition to !o so# -actors relevant to a co&%any>s ability to
successfully close an @?7 inclu!e 'i, its %ast nancial %erfor&ance$ its
nancial %ro:ections for t"e future$ an! its ability to generate
consistent increases in revenues an! earnings$ all of w"ic" are crucial
for a %ublic co&%any to survive in t"e &arket %lace$ 'ii, t"e e9%erience
an! !e%t" of t"e co&%any>s &anage&ent tea&$ 'iii, a soli! %ro!uct
%osition in t"e &arket wit" growt" %otential$ 'iv, a focuse! &ission set
fort" in a well written business %lan to %resent to %ros%ective
un!erwriters$ an! 'v, attorneys$ accountants an! %ublic relations r&s
e9%erience! in working wit" t"e S84# 8s%ecially in t"e case of
tec"nology<base! co&%anies$ t"e !eter&ining factor in t"e success of
an @?7 &ay ulti&ately be t"e rece%tivity of t"e stock &arket to new
issuances in a 4o&%any>s %articular in!ustry at t"e ti&e t"at t"e @?7
is un!ertaken#
T"e co&%any will "ave to satisfy t"e un!erwriters t"at all of t"e above
criteria are &et$ an! even t"en t"e un!erwriter &ay insist on c"anges
to t"e co&%any>s ca%ital structure as a con!ition to its engage&ent#
-or e9a&%le$ t"e un!erwriters &ig"t reBuire t"e co&%any to aAect a
reverse stock s%lit %rior to t"e closing of t"e @?7 in or!er to %rice t"e
s"ares being oAere! in a ty%ical @?7 %rice range# @f t"e un!erwriters
!o not feel t"at t"e co&%any is oAering a suAicient nu&ber of s"ares
to ensure an acce%table JCoatJ of %ublicly tra!e! s"ares$ t"ey &ig"t
reBuire t"at certain stock"ol!ers %artici%ate in t"e oAering by selling
so&e of t"eir own s"ares 'a Jsecon!ary oAeringJ,# T"e un!erwriters
&ig"t also insist on fun!a&ental c"anges in t"e co&%any>s &eans of
con!ucting its business as a con!ition to its engage&ent$ suc" as t"e
cessation of insi!er transactions an! %erceive! conCicts of interest
1)
an! t"e a%%oint&ent of outsi!e !irectors# 4o&%anies w"ic" are not
willing to &ake suc" c"anges &ay not be able to attract an
un!erwriter willing to &anage t"e @?7#
@f t"e issuer belongs to a certain in!ustry t"at is %articularly attractive
to investors at t"e ti&e of t"e %ro%ose! @?7$ it will "ave &ore leverage
in c"oosing an! negotiating wit" an un!erwriter# 4onversely$ if
&arket con!itions are unfavourable at t"e ti&e of t"e oAering$ t"e
issuer will "ave less Ce9ibility in "ow t"e !eal is structure! an! &ay
"ave to %ost%one t"e @?7 altoget"er#
2.1.7 Priar* 'ar"et In#truent
5fter t"e establis"&ent of Securities .oar! of 2e%al in 1))3$ t"e
following instru&ents "ave been use! by t"e 2e%alese cor%orate
bo!ies to raise ca%ital fro& %ri&ary &arket#
2.1.7.1 Coon E8uit* 9 1toc"
T"ese are t"e oAerings t"at entitle t"e "ol!ers or t"e buyers of t"e
oAerings t"e stake on t"e eBuity of t"e issuing co&%any# @n a!!ition$
t"ey are entitle! to+
Loting rig"t at t"e general &eetings of t"e co&%any an!
"ave t"e rig"t to control t"e &anage&ent of t"e co&%any#
Eig"t to s"are t"e %rots of t"e co&%any in t"e for& of
!istribution of !ivi!en! an! bonus s"ares#
@n t"e event of t"e win!ing of t"e co&%any$ eBuity s"ares
ca%itals are re%ayable only after re%ay&ent of t"e clai&s
of all t"e cre!itors an! %reference s"are"ol!ers#
2.1.7.2 Pre&erence 13are# 9 Pre&erred 1toc"#
?reference s"ares ca%ital &ean$ in t"e case of a co&%any li&ite! by
s"ares$ t"at %art of t"e ca%ital of t"e co&%any$ w"ic"
4arries a %referential rig"t to %ay&ent of !ivi!en! !uring
t"e lifeti&e of t"e co&%anyH
2*
4arries$ on a win!ing u%$ a %referential rig"t to be re%ai!
t"e a&ount of ca%ital %ai!<u%#
T"e !iAerent ty%es of %reference s"ares are+
4u&ulative ?referre! stocks
2on<cu&ulative ?referre! stocks
Ee!ee&able ?referre! stocks
2on<re!ee&able ?referre! stocks
4onvertible ?referre! stocks
2.1.7.) $ond# 9 -e/enture#
=ebenture inclu!es !ebentures stock$ bon!s an! any ot"er securities
of a co&%any$ w"et"er constituting a c"arge on t"e assets of t"e
co&%any or not# =ebenture is a !ocu&ent t"at eit"er creates a !ebt
or acknowle!ges it$ an! any !ocu&ent$ w"ic" fulls eit"er of t"ese
con!itions$ is !ebenture# T"e c"aracteristic features of a !ebenture
are as follows+
@t is issue! by t"e co&%any an! is in t"e for& of a
certicate of in!ebte!ness#
@t usually s%ecies t"e !ate of re!e&%tion# @t also
%rovi!es for t"e re%ay&ent of %rinci%al an! interest at
s%ecie! !ate or !ates#
@t generally creates a c"arge on t"e un!ertaking or
un!ertakings of t"e co&%any#
T"e !iAerent ty%es of !ebentures are+
Secure! !ebentures
Gnsecure! !ebentures
Ee!ee&able !ebentures
?er%etual !ebentures
4onvertible !ebentures
21
2.1.7.+ Warrant#
T"e warrant gives a rig"t to t"e "ol!er to obtain eBuity s"ares
s%ecie! in t"e warrant after t"e e9%iry of a certain %erio! at a %rice
not e9cee!ing t"e ca% %rice s%ecie! in t"e warrant# T"e warrant is a
tra!able an! negotiable instru&ent an! is also liste! on t"e stock
e9c"anges# @t co&es in !iAerent for&s$ &ostly+
.on!s wit" warrants
?referre! stocks wit" warrants
.esi!e t"ese instru&ents t"ere is ot"er instru&ental &i9 available to
t"e invest&ent bankers to %rovi!e to t"e %ri&ary &arket investors#
.ut$ t"ese are beyon! t"e sco%e of t"is &anual to !escribe#
2.1.1: Initial Pu/lic O.erin% ;IPO< 'anual
@nitial ?ublic 7Aerings '@?7, &anual is t"e !etail %roce!ure of
"an!ling @nitial ?ublic 7Aerings of t"e co&%anies seeking going
%ublic for t"e rst ti&e# T"is &anual outlines all t"e activities an!
ste%s t"at "ave to be observe! by all issuing co&%anies an! issue
&anagers in res%ect to @nitial ?ublic 7Aerings '@?7,# T"is &anual "as
been %re%are! wit" a view to %resent a !etaile!$ !escri%tive an! ste%<
by<ste% action seBuences in t"e @nitial ?ublic 7Aerings$ relevant to all
t"e co&%anies oAering s"ares to t"e general %ublic# .ut$ it is sub:ect
to %erio!ic a&en!&ents an! su%%le&ents#
T"e ?ublic 7Aering is not an easy task# T"ere are &any organiDations
involves !uring t"is %erio!s# T"ey are+
2.1.1:.1 I##uin% Copan*
@ssuing co&%any is t"e co&%any raising fun!s fro& t"e general %ublic
t"roug" t"e %rocess of %ublic oAering# T"e %ur%ose of %ublic oAerings
is for t"e collection of fun!s fro& general %ublic$ a fun! suAicient
grou%$ by t"e co&%any as %er its reBuire&ent of business e9%ansion#
T"e co&%any seeking for %ublic oAerings coul! be a co&%letely new
22
co&%any 'initial %ublic oAerings,$ a new co&%any set by t"e e9isting
co&%any 'initial %ublic oAerings, or by e9isting liste! co&%any
'successive %ublic oAerings,#
5s %er t"e 4o&%any 5ct$ only %ublic co&%anies are liable to go for
%ublic oAerings# T"e 5ct s%ecically states t"at %rivate co&%anies are
not allowe! to sell t"eir s"ares an! !ebentures in t"e free &arket#
-or %ublic co&%any issuing !ebentures$ t"e reasons for suc" issue$
%ro:ect to be nance! an! its esti&ate! bu!get along wit" t"e
infor&ation about secure! or nake! nature of t"e !ebenture$ nee!s to
be a%%rove! fro& t"e governing bo!ies#
2E. "as &a!e &an!atory t"at nancial institutions &ust go for
co&&on stock %ublic oAerings wit"in s%ecie! ti&e of o%eration
co&&ence&ent# 2E. "as also set fort" !iAerent &ini&u&
%ercentage of eBuity "ol!ing to be oAere! to t"e %ublic s"are"ol!ers#
-or co&&ercial banks$ &ini&u& s"ares to be "el! by %ublic is 3*MH
for nance co&%anies$ it is 4*MH for !evelo%&ent bank it is &ini&u&
3*M an! &a9i&u& of 5*M# @n t"e case of foreign %artici%ation$ t"eir
eBuity "ol!ing woul! be arrange! fro& t"e %ercentage allocate! for
t"e %ublic# -or nance co&%anies$ in t"e event of foreign
%artici%ation$ t"e &ini&u& %ercentage to be allocate! to t"e general
%ublic is 25M of %ai!<u% ca%ital#
-or ot"er %ublic co&%anies suc" co&%liance to go into %ublic
oAerings of eBuity "ol!ing are absent# -or suc" co&%anies$ going into
%ublic signies t"e nee! of fun!s for t"e co&%any rat"er t"an t"e
obligation#
T"e %rovisions an! con!itions of Securities Eegistration an! @ssue 5ct$
2*51 "as set t"e gui!elines t"at before going into %ublic oAerings$
issuing co&%any s"oul! take into consi!eration t"at
a< I& t3e i##uin% copan* i# indu#trial in#titution#
23
T"e institution "as boug"t t"e lan! or &a!e ot"er
%rovisions in w"ic" necessary infrastructure like
factoryH oAice buil!ings$ go!owns etc# are alrea!y
buil! in or &a!e necessary arrange&ents for it#
2ecessary tec"nology "as been selecte! for w"ic"
s%are %arts of &ac"ineries nee!e! "ave been
boug"t# @f not$ L4 "as been o%ene! to buy t"e
necessary tec"nologies#
8sti&ate! bu!get "as been %ro%ose! for t"e %ro:ect
to be i&%le&ente! an! for w"ic" if loans are
reBuire!$ suc" agree&ents are alrea!y &a!e#
@n t"e absence of long<ter& loan agree&ent$ issue
securities are un!erwritten#
2ecessary a%%rovals accor!ing to t"e e9isting 5cts
"ave been taken#
/< I& t3e i##uin% copan* i# =nancial in#titution#
5ccor!ing to t"e nature of t"e business$ reBuire!
infrastructures are installe!#
5%%roval "as been taken un!er t"e 4o&%any 5ct
2*63#
-or co&&encing ot"er activities$ aut"ority an!
a%%roval fro& governing bo!ies base! on e9isting
5cts "as been taken#
2.1.1:.2 'erc3ant $an"er#
0erc"ant bankers are inter&e!iaries in w"ic" t"ey work as &e!iators
in t"e fun! &obiliDation fro& t"e general %ublic to t"e business
grou%s# T"e fun!s are raise! fro& t"e "y%ot"etical &arket t"at
co&%rises wi!ely s%rea! fun! sur%lus grou%s$ &ainly t"e general
%ublic an! t"e concentrate! fun! !ecient grou%s$ &ainly t"e
business grou%s# -un!s are raise! un!er !iAerent tool na&es t"at
24
"ave long<ter& an! s"ort<ter& &aturing %erio!# 5ccor!ing to suc"
&aturity %erio! of t"e tools tra!e!$ &arket is i!entie! as ca%ital
&arket for long<ter& an! &oney &arket for s"ort<ter& tools to be
tra!e!#
T"e role of &erc"ant bankers in t"is &arket is to "el% create an!
e9%an! securities un!erwriting$ t"e secon!ary &arket for securities
an! &oney &arket# T"ey also %rovi!e a!!itional services in a!vising
cor%orations an! &anaging invest&ent %ortfolio for t"e nee!ing
grou%s#
T"e conce%t of &erc"ant banking !iAers fro& ot"er co&&ercial an!
!evelo%&ent banks in res%ect t"at t"ey !o not reBuire large fun!s to
be investe! as a %rinci%le# T"eir sources of inco&e are basically t"e
service c"arge t"ey c"arge to t"eir clients for %laying inter&e!iary
role in t"e fun! &obiliDation an! t"eir a!visory role# Ty%ically$ t"e
activities of !o&estically oriente! invest&ent banks can be grou%e!
un!er+
Securities un!erwriting
T"e secon!ary &arket for securities
T"e &oney &arket
4or%orate a!visory services
@nvest&ent %ortfolio &anage&ent services$ an! also
Lenture ca%ital
Leasing F "ire %urc"ase
7t"er services 'insurance$ real estate etc#,
T"e role of &erc"ant banking in &anaging t"e %ublic oAerings co&es
un!er t"e "ea!ing of securities un!erwriting# T"e working %rocess of
w"ic" woul! be !escribe! co&%re"ensively later#
25
-or t"e working of &erc"ant banking function in 2e%al$ 2e%al Eastra
.ank '2E., "as set fort" t"e working gui!elines# 6ui!elines "ave
i!entie! working of &erc"ant banking into two sets of functions#
T"e rst set is t"e non fun!<base! functions an! t"e secon! set is
fun!<base! functions#
-un!<base! activities i!entie! for t"e &erc"ant banking are+
.ri!ging nance
Gn!erwriting
?ro:ect nance
Lenture ca%ital
5cBuisition an! &erger
2on fun!<base! activities i!entie! for t"e &erc"ant .anking are+
S"are issue &anage&ent
0utual fun!
?ortfolio &anage&ent
4or%orate counselling
?ro:ect counselling
=ebenture trustees"i%
5rranging international nance
@nvest&ent a!visor
5!vising cor%orate &ergers
2E. "as set t"e !irectives as for non fun!<base! activities of
&erc"ant banking$ for un!erwriting an! for bri!ging nance it is not
necessary to take se%arate a%%roval fro& 2E.# .ut$ for ot"er fun!<
base! activities of &erc"ant banking$ it is necessary to take se%arate
a%%roval fro& 2E. for !iAerent activities to be un!ertaken#
26
@n 2e%al$ t"ere are 1 &erc"ant banks are alrea!y establis"e!# T"ey
are %rovi!ing issue &anager$ lea! un!erwriter$ register$ transfer of
s"ares etc# services to ot"er institutions#
2.1.1:.) 1ecuritie# $oard
Securities boar! "as been for&e! un!er t"e Securities 89c"ange 5ct$
2*4* 4lause 3# T"is legislation "as reBuire! for t"e creation of an
in!e%en!ent Statutory .oar! to be an a%e9 aut"ority for securities
&arket$ t"us resulting into t"e for&ation of Securities .oar!#
T"e nee! of legislative bo!y is for &aintaining "ealt"y an! or!erly
!evelo%&ent of t"e securities &arkets an! to ensure a!eBuate
investor %rotection# 8stablis"&ent of Securities 89c"ange .oar!
'S8., is necessary to %ro&ote &arkets t"at ensure+
Fairne##4 T"e &arkets &ust %ro&ote integrity in !ealings$
"ig" stan!ar!s of con!uct an! goo! business %ractice#
E.icienc*4 T"e &arkets s"oul! wit" %rofessionals an! be
well infor&e!$ oAering "ig" stan!ar!s of service at
reasonable cost#
Con=dence4 T"e &arket &ust ins%ire con!ence in bot"
investors an! issuers to actively %artici%ate in an! rely
&ore on t"e securities &arkets#
Fle>i/ilit*4 T"e &arkets s"oul! be resilient$ innovative
an! be continuously res%onsive to t"e nee!s of all &arket
%artici%ants#
Role o& 1ecuritie# $oard in I##ue o& 1ecuritie#
@n its a%%roac" to &anage %ublic issues of securities$ t"e .oar! will
bear in &in!
a. (rotection of rights and interests of the investor, especially,
The right to ade)uate, true and fair information
The need for li)uidity
21
(rompt, fair and e)uitable allotment
&asy and efficient service in allotments and transfers
b. The need to encourage corporate entities to tap the securities markets for
their diverse resources needs.
The 2oard would endeavour to evolve market and institutional structure, a set of
instruments and methods of public offerings to cater the above ob!ectives.
The legislative provisions relating to public issues of securities may be classified underB
a. Capital control, governing issue of securities and the terms of their issuesB
To regulate terms of issues of securities from the viewpoint of
investor protection, issuers needs and overall development of the
securities market: and
To promote sound capital structure of companies.
b. (rospectus provisions, governing the disclosure of information at the time
of issue of any security:
c. *bligations of regular disclosure of financial and other information on
entities making public issues:
d. 'isting re)uirements governing traded securities:
e. (rovisions governing allotment and transfer of securitiesB
&nsuring fair and e)uitable allotment: and
(romoting speedier and more efficient service in matters of
allotment and transfer.
!.1.11.) Off'ce, of the Reg',trar of Co"/an'e, 2ROC3
Fegistrar of Companies "F*C# is the governing body for any institution registered under
Company Act. In its governing role, it observes and regulates any company going into
public eamining whether the process of Ggoing publicH is in accordance with the rules
and regulations set forth by the eisting Company Act or not.
As per the Company Act ;196, public companies need to publish their prospectus before
issuing securities to the public. 2efore publishing prospectus, one copy of the prospectus
2;
needs to be submitted to F*C. In this process, F*C approves the prospectus to be
published. .hile approving the prospectus, F*C makes sure that important information
is not missed out and unnecessary information is not mentioned. In the presence of such
changes, F*C sends it back to the company for necessary changes. ?pon satisfactory
changes F*C grants approval to issuing company to issue the prospectus. Apart from
approving the prospectus to be published by the issuing company before going into
public, F*C does not play other ma!or role.
!.1.11.* Stock E4change 5arket
%tock echange has been defined as any body of individuals, whether incorporated or not,
constituted for the purpose of assisting, regulating or controlling the business of buying
and selling of or dealing in securities. The stock echange therefore is the most important
institution in the secondary market. In the primary market, it comes into play during
primary share allotment, during issuing share in premium and when %ecurities 2oard asks
%ecurities &change +arket for its opinion.
%ecurities &change Act ;196 has stated that for the operation of the stock echange
market, approval needs to be taken from the %ecurities &change 2oard. Any registered
institution ecept private companies willing to do or allow others to do security
transaction should get approval for securities echange market from the securities board.
After the issue of securities to the public, the Act re)uires that companies be listed in the
%ecurity &change +arket before the floated shares can be traded in the market. $epal
%tock &change 'imited "$&(%&# is the only stock echange market in the country.
!.1.11.6 7'nanc'a$ In,t'tut'on,
They are financial intermediaries like commercial banks, finance companies "merchant
bankers#, and development banks and cooperatives institutions. These institutions are
established under the Company Act and $epal Fastra 2ank 8irectives. These financial
institutions perform the role of intermediaries in the securities issue as per the authority
received from the %ecurities &change 2oard. /inancial Institutions are involved in
securities issue process asB
Issue managers
2)
?nderwriters
!.1.11.6.1 I,,ue 5anager
@ssue &anager in t"e %ri&ary &arket carry out all t"e function relate!
to %ublic issuance of securities on be"alf of t"e issuing co&%any#
?resently t"ere are ) issue &anagers in t"e &arket# K"ic" are+
3*
Ta/le 2.1
(ae o& I##ue 'ana%er o& (epal
1. (o. Na"e of I,,ue 5anager
1# 5ce =evelo%&ent .ank Li&ite!
2# 4itiDen @nvest&ent Trust
3# 2@=4 4a%ital 0arkets Li&ite!
4# 2e%al -inance Li&ite!
5# 2ational -inance 4o&%any Li&ite!
6# 20. .ank Li&ite!
1# 2e%al Sri Lanka 0erc"ant .ank Li&ite!
;# 2e%al S"are 0arkets an! -inance Li&ite!
)# 4ivil 4a%ital 0arket Li&ite!#
1*# Gnite! -inance Li&ite!
11# 8lite 4a%ital Li&ite!
12# 2e%al 3ousing an! 0erc"ant -inance Li&ite!
13# Libor .ikas" .ank Li&ite!
14# =evelo%&ent 4re!it .ank Li&ite!
15# Tinau .ikas" .ank Li&ite!
16# @nvest&ent 0anage&ent 0erc"ant .anker
Li&ite!
11# .ee! @nvest&ent Li&ite!
1;# 6ro&ore 0erc"ant .anker Lt!
Sources: www.sebonp.com
!.1.11.6.! Under8r'ter,
6enerally all co&&ercial banks$ nance co&%anies an! ot"er nancial
institution can %rovi!e un!erwriting services an! %rovi!ing suc"
services accor!ingly# .ut t"e %ublic issue getting un!erwritten "as
beco&e 3erculean task# 5l&ost banks$ nance co&%anies an!
nancial institutions reluctant to un!erwrite t"e %ublic issue of s"ares
because t"ey feel t"at un!erwriting is risky business# T"is ty%e of
reluctant "as been strengt"ene! &ore by so&e !evelo%&ent cases#
7n t"e ot"er "an!s$ t"ese e9it so&e ano&aly in un!erwriting conce%t
between 2ew 4o&%any 5ct an! securities e9c"ange regulation#
4o&%any 5ct !enes issue &anager as un!erwriters a well# Secon!ly
no acts an! regulations clearly s%ells about t"e Bualication to be an
un!erwriter t"at w"o can un!erwrite t"e %ublic issue an! w"o can not
or w"et"er banks nance co&%anies an! nancial institution ot"er
31
t"at &e&ber of 2e%al Stock 89c"ange can %rovi!e t"e un!erwriting
services t"at t"ere is always !ecient fun! F resources to &eet t"e
!e&an! of un!erwriting# T"ir!ly$ because of t"e insuAicient resources
an! !es%ite of t"e reluctance of co&&ercial banks 'w"o "ave
enor&ous resources,$ issue &anager are so&e"ow &anaging t"e
consortiu& of un!erwriting#
!.1.11.9 Ne/a$ Ra,tra Bank 2NRB3
$epal Fastra 2ank is the central banking authority in $epal. It is the governing authority
in setting guidelines to all the financial institution regarding its area of operation. 2ut, in
the case of public offerings, its involvement is very minimal. Its role in the issue process
is only to grant financial institutions approval to be involved with different role in the
issue process. Also for different fund based activities of merchant banking, approval
needs to be taken from $epal Fastra 2ank.
!.1.11 Ter", In(o$(ed 'n the Proce,, of In't'a$ Pu#$'c Offer'ng, of Co""on Stock,
!.1.11.1 In't'a$ Pu#$'c Offer'ng 2IPO3
It is a process by which an institution raises desired capital through issuing of securities
"common stock, preferred stock, bond, commercial paper and debentures# in the capital or
money market for the first time.
/or the purpose of public offerings, Company Act has specified that the public issue
process of any public company should be managed through the institution receiving
authority from %&2. Internationally, financial institutions with the merchant banking
operations, manage the overall issue process of any public limited company. %uch
institution managing the overall process of the public offerings is termed as an issue
manager.
!.1.11.! I,,ue 5anager
Issue manager is the institution solely holding the responsibility of managing the public
offerings of any issuing company. %ecurities &change Act, ;1>1 clause 4@, has defined
issue managers as institutions holding license from the %ecurity 2oard to manage public
32
offering process. The format of application letter and re)uired information to be provided
while registering for issue manager are given in the appendi.
!.1.11.% +ead 5anager
In the event of more than one issue managers managing the issue of securities of any
company, the term lead manager is used to identify the individual issue managers. The
eisting Act and the 8irectives have not clearly identified the maimum number of lead
managers managing securities issue of any company at the same time.
!.1.11.) Under8r't'ng
?nderwriting is an agreement between the issuing company and a financial institution
like bank, merchant banker, broker or other person, providing for their taking up the
shares or debentures to the etent specified in the agreement between them, if it is not
subscribed by the public. The underwriting agreements ensure that the public issued is
fully subscribed. The commission paid to the underwriters as consideration for the
underwriting arrangement is known as underwriting commission.
!.1.11.* +ead Under8r'ter
'ead ?nderwriter is the one that arranges the whole underwriting process for the issuing
company with the help of other sub-underwriters. The issuing companies and
intermediaries should note that underwriting is a serious contractual arrangement having
financial implications on the issuer and the underwriter. The business of underwriting,
therefore, presupposes inherent financial strength on the part of the underwriters. In the
process of identifying underwriters, therefore, issue manager must satisfy himself about
the net worth of the underwriters and their outstanding commitments and disclose.
In the event that the issued shares are not fully subscribed by general public, the
distribution of unsold share to the underwriters would be held on the pro-rata basis based
on the number of shares committed by them to underwrite.
!.1.11.6 Under8r'ter, or Su#-under8r'ter,
They are the smaller institution agreeing to underwrite fewer number shares.
?nderwriters and sub-underwriters work under the management of the lead underwriter.
33
Their financial responsibility remains within the total amount of shares agreed by them to
undertake.
!.1.11.9 Banker to the I,,ue
2anker to the issue is normally a commercial bank, which provides the custodian service
to the issuing company and keeps the subscription money. 2anker to the issue may or
may not receive applications from the investors, issue acknowledgements for the same,
and enter the application details in application schedules. It also involves in the process
by realizing the proceeds of the che)uesCdraft and issue final certificates to the issue
manager for the number of applications and amount collected. Issuing company in
consultation with the issue managers makes the appointment of banker to the issue.
The banker to the issue generally comprises the consortium of bankers providing working
capital finance to the company, the banks providing underwriting assistance for the issue,
the bank associated with the issue managers and other banks which are regularly and
efficiently handling public issue work.
!.1.11.: Co$$ect'on Centre,
Collection Centres are normally financial institutions such as banks, finance companies,
brokerage houses etc. Collection centres receive applications from the investors, issue
acknowledgements for the same, and enter the application details in application
schedules. They also realize the proceeds of the che)ues C drafts and issue final
certificates to the issue manager for the number of applications and amount collected.
The appointment of collection centres is made in consultation with the issue managers.
!.1.11.; Pro,/ectu,
The prospectus is defined as, Gany document described or issued as a prospectus and
includes any notice, circular advertisement or other document inviting deposits from the
public or inviting offers from the public for the subscription or purchase of shares in, or
debentures of, a body corporate.H
The Company Act ;196 has made mandatory that any public institution going into public
offerings must issue the prospectus before issuing the securities to the public. According
to the Act, before publishing for the public, the prospectus signed by the board of
34
directors should be sent to and get approval from the *ffice of Fegistrar of the
Companies and %ecurities 2oard. The re)uirement is made to make sure that the
information provided to the public is as per re)uirement and is not manipulated to mislead
the public. The prospectus published for the public should state in the publication the
approval from the *ffice of Fegistrar of the Companies.
The Company Act ;196 has stated that matters referred in the prospectus are the liability
and responsibility of company publishing it. 2oard of 8irectors signing the documents is
answerable to the matters stated in the prospectus. In the event that, company has
knowingly published false statement in the prospectus and believing on which if
securities has been purchased and loss incurred, such loss coverage would be the personal
liability of the directors signing the prospectus.
In short, prospectus is a legal document containing important features of Article of
Association, +emorandum of Association, and important decision taken by the board of
the company affecting the future of the company and important conditions to be obeyed
by the general applicants. The main purpose of the publishing prospectus is to inform
public about the company and the issue.
!.1.11.11 Budget for the I,,ue
2udget for the issue is a tentative figure of epenses that is estimated to incur in the
process of public offerings. The budget is to be born fully by the issuing company, if not,
according to the understanding reached between issuing company and the issue
managerCs.
!.1.11.11 A//$'cat'on 7or"
It is a form provided to general public to apply for the issued securities by a company.
The application forms needs to be filled both in &nglish and $epali. It contains
information about the company, issue of shares, and space for applicants to fill in for the
buyersI detail information.
Application form is the legal document that the investor provides to the company stating
the number of shares of a company heCshe is willing to accept. The applicants submitting
the application forms would imply that heCshe has accepted the terms and conditions
35
stated in the application form with the full knowledge about the matters referred in the
prospectus. Attached with the application form a photocopy of citizenship is collected as
a proof to applicantsI acceptance to terms and condition and a remedy to possible
discrepancies in identification. In case of minor applicants, citizen certificate of parents
or guardian is to be attached.
!.1.11.1! Br'dge 7'nanc'ng
It is a short term lending provided to the issuing company till the date of share allotment,
backed by the collection from public issue. The company is to make the payment after
receiving allocated shares money from public offerings. $ormally financial institutions
provide bridge loans to companies against their underwriting commitments. The said
loans are ad!usted against allotment of sharesCdebentures. The bridge finance is issued
when Companies re)uire meeting their immediate re)uirement of funds. If there is a
substantial lead-time between making a public issue and commencement of commercial
production. If issues is to be deferred to the most opportune time.
!.1.11.1% 5e"orandu" of Under,tand'ng
In the process of issuing securities to the public, besides issuing company, different
intermediaries are involved. +emorandum of ?nderstanding is the legal agreement made
between issuing company and different intermediaries. This agreement states the terms
and condition in respect to the function and authority of the involved parties.
8ifferent +*? to be signed in the process of issue offerings are,
+*? between issuing company and the issue managerC lead managersB This
is re)uired as the Company Act re)uires securities issue process of any
public company is to be done through the registered issue manager. This
legal agreement between issuing company and issue manager specifies
terms and condition, responsibilities and the authorities of involved party.
+*? between issue managers and the underwriters
+*? between issue manager and the bankers to the issue.
+*? between issue manager and the collection centres.
!.1.11.1) I,,ue Co""',,'on
36
It is the commission charged by the issue manager to the issuing company for the service
it has provided. Issue commission is paid for issue management process. The
responsibility of issue manager in the issue process, for which issue commission is to be
charged as demarcated in the agreement itself. The commissions are normally set as per
the negotiation.
!.1.11.1* Under8r't'ng Co""',,'on
?nderwriting commission is the amount charged by the underwriters for underwriting the
securities issued. The commissions are normally determined as per the negotiation.
!.1.11.16 Co$$ect'on Charge,
Collection charges are the amount charged by the collection centres for collecting the
application forms and other documentation process. The collection charges are also
charged on percentage of the amount collected. The percentage charged also depends
upon the negotiation between issue manager on behalf of issuing company and the
collection centres.
!.1.11.19 Refund Charge,
Fefund charges are the amount charged by the collection centres for refunding the
oversubscribed money to the general investors. The refund charges are charged on
percentage of the total amount refunded. The percentage charged depends upon the
negotiation between issue manager on behalf of issuing company and the collection
centres.
!.1.11.1: 7'4 Charge, to the Co$$ect'on Centre, < 7'nance Co"/an'e,
It is a fi charged given to the collection centres like finance companies for making
re)uired preparation for collecting application from the investors and conducting other
re)uired activities. The fi charge amount provided to the collection centres is also based
on the negotiation.
!.1.11.1; Pre I,,ue and Po,t I,,ue
(re-issue in the issue process is defined from the point of approach by the issue manager
to the prospective issuing company to the point of allotment of securities and refund of
oversubscribed money to the investors. This segregation has been made on the basis of
31
Company Act, as it re)uires that the process of securities issue, allotment of securities,
collection of subscription needs to be done through institutions approved to carry out
issue management.
!.! Re('e8 of Pa,t Re,earch The,',
The role of the (rimary market has been increasing now-a-days. Any corporation can
raise its re)uired fund through (rimary market and its process. It may canalize such
savings into investments in productive sectors. It definitely leads to the economic
growth. %o the primary market is playing a role for the development of national
economy.
S"rest"a$ '1))6, ?ublic res%onse to ?ri&ary issue of S"ares in
2e%al# 3is stu!y reveals t"e fact t"at t"e sco%e of %ri&ary &arket in
recent !ays is boo&ing# 8ven t"e general investors "eavily invest
t"eir saving in t"e new issue of s"ares causing over subscri%tion to a
great !eal# S"rest"a "ere asserts t"at t"e growt" of t"e %ri&ary
&arket in encouraging since &any %ublic li&ite! co&%anies inclu!ing
:oint venture banks "ave been successful in ta%%ing ca%ital t"roug"
t"e Coatation of s"ares to t"e general %ublic# T"e %ositive res%onse of
t"e investors to t"e co&%anies is a !irect &anifestation of t"e growing
%ublic con!ence in t"e %ri&ary &arket# T"e general %ublic si&%ly
ta%s everyt"ing t"at co&es on t"eir way$ regar!less of t"e %ro&oters
backgroun! an! co&%any feasibility# 8ac" co&%any co&e into t"e
&arket "as been successful in ta%%ing t"e ca%ital fro& t"e &arket an!
t"e issue close! wit"in t"e &ini&u& sti%ulate! ti&e of seven !ays
wit" "uge over subscri%tions#
3abibulla" '1))),$ J-inancial 0arkets in Least =evelo%&ent
4ountries$J evi!ences t"at in so&e 5sian countries inclu!ing 2e%al
econo&ic !evelo%&ent reCecte! in econo&ic growt" lea!s t"e
nancial !evelo%&ent &easure! in t"e ratio of broa! &oney to gross
national %ro!uct '02 F 62?,# T"is i&%lies t"at econo&ic !evelo%&ent
"as %rece!e! t"e nancial &arket !evelo%&ent in t"e case of 2e%al#
3;
.ut several ot"er stu!ies con!ucte! in ot"er L=4s reveal t"at t"e
nancial !evelo%&ent "as %rece!e! t"e econo&ic !evelo%&ent# T"e
stock &arket !evelo%&ent &easure! by &arket liBui!ity$ &arket
ca%italiDation an! total turnover is correlate! wit" current an! future
econo&ic growt"$ ca%ital accu&ulation$ an! %ro!uctivity growt"$ as
evi!ence! by Levine an! Nervos '1))6,# T"e eAicient &oney$ foreign
e9c"ange an! ca%ital &arkets increase invest&ent to t"e &ost
%ro!uctive sector of t"e econo&y an! t"ereby increase out%ut t"roug"
saving &obiliDation# Suc" &arkets also %rice t"e risk associate! wit"
any invest&ent accurately#
(andey, ";114# conducted a study on, ,(ublic Fesponse to (rimary Issue of %hares in
$epal., with the ob!ective to identify the problems of primary issue and to assess the
growth of the primary issue and also to analyze the pattern of public response to shares.
<e has summarized his findings asB (ublic response in primary market is high due to lack
of opportunities for investment in other fields. $o proper investment analysis is been
made. <is ma!or conclusions areB
(eople need to understand how market situation works, analyze the fluctuation of price
and make decisions accordingly for maimum return. (otential investors need to
consider before investing in the share market.
The dynamism of the stock market has been greatly reduced by the domination of the
long term shareholders, who prefer holding the shares with the hope of increasing their
wealth. This can be !ustified by small number of shares that are traded on the stock
market. &ven though this reduces the dynamism of the stock market. The investors have
very few rather no alternative to holding shares.
(audel ";11;#, has done, ,Investing in shares of Commercial 2anks in $epalB An
Assessment of Feturn and Fisk &lements., +a!or finding of his study areB The shares of
commercial banks in $epal are heavily traded in the stock market and, therefore, these
shares play a key role in the determination stock echange indicators. The average mean
return on market portfolio, as measured by percent changes in the $&(%& inde, is 0.04
3)
percent over the sample period. All the shares produced higher rates of return than the
return on market portfolio. <owever, the risk-return characteristics do not seem to be the
same for all the shares reviewed. The shares with larger standard deviations seem to be
able to produce higher rates of return. The portion of unsystematic risk is very high with
the shares having negative beta coefficient. The risk per units of return, as measured by
the coefficient of variation, is less than that of the market as a whole for all the individual
shares. +ost of the shares fall under the category of defensive stocks, "having beta
coefficients less than 4#, ecept the shares of 2ank of Jathmandu 'imited. Feturn on the
shares of $epal Arab 2ank 'imited is negatively correlated with the return on market
portfolio and, therefore, it has negative beta coefficient. /rom the analysis, it appears that
none of the shares are correctly priced. Theoretically, the market price of an over-priced
"under-priced# share will fall "rise# in order to increase the epected return such that the
epected return e)uals the re)uired return. Therefore, shares of $epal Arab 2ank
'imited, $epal Indosuez 2ank 'imited and <imalayan 2ank 'imited, which are
overpriced relative to e)uilibrium thus market forces, will decline. The remaining share
appears to be under-priced indicating a possible positive long term price trend.
S"ar&a$ '2**2, 4on!ucte! researc" on t"e to%ic of ?roble&s an!
?ros%ects of ?ri&ary an! Secon!ary 0arket in 2e%al# 3e tries to
s"ow t"e %roble&s an! %ros%ects of 2e%alese stock &arket as well as
t"e %resent status of %ri&ary an! secon!ary &arket# 3is &a:or
n!ings are as follows+
T"e e9isting %roble&s coul! be resolve! only w"en general %eo%le
un!erstan! "ow &arket works# T"ey nee! to un!erstan! t"at kee%ing
t"e s"ares &ay not be t"e best alternative# T"ey nee! &ore
infor&ation t"at w"at factors to be consi!ere! before investing t"e
&oney in s"ares#
?eo%le nee! to analyDe t"e nancial %osition of t"e r& before
subscribing an! not to go wit" ru&ours an! wrong infor&ation
%revailing in t"e &arket# T"ey nee! to look for t"e best alternative
t"ey can get wit"in t"e given ti&e fra&e#
4*
?au!el$ '2**6, w"o "as !one researc" on ?ublic Ees%onse to @nitial
?ublic 7Aering in 2e%al$ wit" t"e ob:ective of+ to i!entify t"e !ealing
%rocess of @?7$ analyDe t"e %ace of @?7 an! analyDe t"e %ublic
res%onse to t"e @?7# 3e "as conclu!e! t"at general investors in
2e%al !o not "ave suAicient infor&ation regar!ing t"e %ri&ary
&arket an! in s%ite of t"is t"ey are intereste! in investing &oney in
t"e %ri&ary &arket# T"ey are &ore intereste! in nancial sector t"an
non<nancial sector# 3e "as also su&&ariDe! t"at %ace of initial
%ublic oAering in 2e%al see&s to be irregular# 8ven t"oug" t"e
organiDations %rocess of %ublic oAering is Buite long$ t"e service
%rovi!e! to t"e investors see&s to be satisfactory# ?ublic res%onse in
stock &arket is "ig" !ue to lack of o%%ortunities for invest&ent in
ot"er sector# =es%ite t"is$ %ublic are attracte! towar!s s"ares to
increase t"eir value of invest&ent#
2.2.1 Re6ie! o& $oo"# and ?ournal#
T"ese !ays internet "as beco&e t"e &ost easily accessible &e!iu& to
gain infor&ation in any sub:ect &atter# @n t"e stu!y %erio!$ !iAerent
articles an! :ournals "ave been consulte!#
?aul@ '1)6*, in "is article T"e Eeview of @nternational 4a%ital
0arkets %ublis"e! in t"e :ournal T"e 5&erican 8cono&ic Eeview
"as %lea!e! t"at t"e !evelo%&ent of worl! ca%ital &arket a%%ears to
be reac"ing t"e state w"ere t"ey can &ake signicantly greater
contribution to worl! econo&ic growt" an! tra!e# 0ore i&%ortantly$
t"e groun!work "as been lai! for t"e "ealt"y !evelo%&ent an! future
growt" of international ca%ital &arkets# .arring t"e intervention of
war or ot"er &a:or !isturbances$ worl! ca%ital &arket give %ro&ise of
being able to %lay an! increasingly i&%ortant$ t"roug" no
%re!o&inant role in t"e &ove&ent of ca%ital internationally#
Si&"a$ '1)6*, @n connection wit" t"e necessary of ca%ital &arket in
"is book T"e 4a%ital 0arket in @n!ia "as observe! t"at ca%ital is an
41
e9tre&ely fascinating sub:ect an! eAicient ca%ital &arket is an
in!is%ensable %rereBuisite to econo&ic !evelo%&ent# @n fact$ even as
regar!s t"e resources for t"e %ublic sector$ t"e ca%ital &arket "as a
rat"er i&%ortant role to %lay#
S"rest"a@ '2**2, "as analyDe! w"y t"e s"are &arket is inactive an!
w"at are t"e &ain causes for inactiveness an! w"at &easures s"oul!
be !one etc are carefully !ene!# Si&ilarly$ "ow t"e securities frau!s
an! &ani%ulation "ave occurre! an! to w"at e9tent t"ey can be
overco&e woul! be "ig"lig"te! "er to !raw a!eBuate fee!back to t"e
regulating an! controlling aut"orities to !evise suitable laws to
%revent suc" frau!s an! &ini&iDe &ani%ulation in s"are %rice#
42
=a"al$ '2**1, in "is article T"e ?erfor&ance of 2e%alese @?7s
%ublis"e! in t"e Sebon :ournal$ t"e %a%er assesses t"e %erfor&ance of
2e%alese @?7s an! relates t"e& to %otential factors# T"e stu!y n!s
t"at t"e 2e%alese @?7s are "eavily oversubscribe! an! %rovi!e t"e
investors wit" t"e &arket a!:uste! e9cess rate of return lea!ing to t"e
conclusion t"at 2e%alese @?7s are un!er%rice! too#
T"e lea!ing business :ournals like JT"e .ossJ &agaDine$ JT"e 2ew
.usiness 5geJ an! J5a:a (o 5b"iyanJ "ave been use! !uring t"e stu!y#
T"e !iAerent writer>s !iAerent views$ t"e %ri&ary &arket scenario i#e#$
current scenario "as been !iscusse! a&ong t"e grou% &e&bers
!uring t"e researc"# T"e websites "ave been use! instea! of :ournal
of !iAerent organiDations# Like for t"e knowle!ge of govern&ent
securities$ 2E. website$ for ot"er infor&ation S8.72 website an!
!iAerent worl! lea!ing &anage&ent websites "ave been use!#
2.2.2 Report on Pu/lic I##ue Appro6al
5 total of 64 %ublic li&ite! co&%anies raise! fun!s a&ounting to Es#
1*$66;#2 &illion by issuing securities in t"e scal year 2**1F*;# @n
t"e scal year 2**6F*1$ a total of 34 %ublic li&ite! co&%anies "ave
raise! fun!s a&ounting to Es# 2$2)5#5 &illion#
@n t"e last scal year$ total liste! co&%anies in 2e%al Stock 89c"ange
Lt!# were 135 w"ic" reac"e! to be 15* in t"e scal year 2**1F*;# @n
t"e scal year 2**1F*;$ t"e turnover increase! by 112#); %ercent to
be Es# 22$;2*#; &illions co&%are! to turnover of Es# ;$36*#1 &illion in
t"e scal year 2**6F*1#
@n t"e scal year 2**1F*;$ t"e &arket ca%italiDation of t"e liste!
co&%anies increase! by )6#5) %ercent to be Es#3$66$241#5 &illion as
co&%are! to &arket ca%italiDation of Es# 1;$63*#13 &illion in t"e scal
year 2**6F*1# @n t"e -iscal year 2**1F*; t"e %reli&inary esti&ate of
t"e contribution of &arket ca%italiDation to t"e 6=? is 44#62 %ercent#
43
2.) Cour#e o& Action durin% IPO
2.).1 Preparin% t3e Re%i#tration 1tateent
@&&e!iately following$ an! in so&e cases %rece!ing$ t"e kick<oA
&eeting$ t"e co&%any an! its counsel will begin work !rafting t"e
registration state&ent# @n a %ublic oAering$ bot" t"e content an! for&
of an issuer>s registration state&ent &ust strictly co&%ly wit" S84
rules# @n &ost @?7s$ t"e issuer is reBuire! to le its registration
state&ent on -or& S<1# @n fact$ -or& S<1 is not a Jfor&J w"ic" a
co&%any lls out$ but rat"er a list of ite&s of infor&ation w"ic" t"e
co&%any &ust inclu!e in t"e registration state&ent# 8ac" of t"ese
ite&s references a rule in S84 Eegulation S<( 'or Eegulation S<O in
t"e case of nancial infor&ation, w"ic" %rovi!es in !etail t"e a&ount
an! for&at of t"e infor&ation to be %rovi!e!#
5 registration state&ent on -or& S<1 consists of two %arts$ w"ic" will
be boun! toget"er in a single book an! le! wit" t"e S84 as a %ublic
!ocu&ent# ?art @ is t"e infor&ation t"at &ust be inclu!e! in t"e
%ros%ectus$ t"e actual oAering !ocu&ent to be !istribute! to %otential
investors after t"e ling of t"e registration state&ent# ?art @@$ w"ic"
is le! wit" t"e S84 an! &a!e %ublicly available but is not reBuire! to
be !istribute! to oAerees$ contains su%%le&ental infor&ation$
inclu!ing$ as e9"ibits$ t"e un!erwriting agree&ent$ t"e co&%any>s
c"arter an! by<laws$ an! all contracts to w"ic" t"e co&%any is a %arty
t"at coul! &aterially inCuence a %otential investor>s !ecision as to
w"et"er to %urc"ase t"e securities being oAere!# T"e co&%any can
seek to re!act fro& suc" contracts t"ose li&ite! %rovisions w"ic" it
feels contain con!ential business infor&ation by blacking t"e& out of
t"e ling an! sub&itting se%arately to t"e S84 an a%%lication for
con!ential treat&ent w"ic" e9%lains "ow t"e co&%any coul! be
"ar&e! by !isclosure of suc" infor&ation# ?art @@ also contains t"e
signature %age to t"e registration state&ent$ to be signe! by t"e
44
co&%any>s %rinci%al e9ecutive$ nancial an! accounting oAicers as
well as by at least a &a:ority of its !irectors#
T"e %ros%ectus serves two i&%ortant roles# -irst$ it is a selling
!ocu&ent inten!e! to %resent invest&ent in t"e co&%any as an
e9citing o%%ortunity# 5s suc"$ it s"oul! be well written an! visually
%leasing# T"e un!erwriters generally "ave strict gui!elines as to for&
an! style$ w"ic" t"ey will co&&unicate to t"e nancial %rinter# T"e
un!erwriters will occasionally %ro"ibit t"e !istribution of a %ros%ectus
if t"ey n! it !eviates fro& suc" gui!elines$ so it is i&%ortant to
ensure t"at t"e %rinter "as receive! an! reviewe! t"e &anaging
un!erwriter>s instructions#
Secon!$ t"e %ros%ectus is a !isclosure !ocu&ent w"ic" &ust &ake
co&%lete an! accurate !isclosure of all &aterial infor&ation about t"e
co&%any an! t"e oAering to %rotect t"e co&%any fro& clai&s by
investors# 5s suc"$ t"e co&%any>s an! un!erwriter>s counsel will
s%en! consi!erable ti&e ensuring t"at t"e %ros%ectus sets fort" in
%ro%er or!er an! for&at all suc" infor&ation$ bot" t"roug"
continuous review of t"e S84 rules as well as t"roug" an ongoing
business$ legal an! accounting !ue !iligence investigation of t"e
co&%any#
T"e %ros%ectus is generally organiDe! as follows+
T"e ?ros%ectus Su&&ary$ w"ic" contains a s"ort
!escri%tion of t"e co&%any$ its business$ t"e oAering an!
su&&ary nancial !ata#
Eisk -actors$ w"ic" i!entify an! !escribe risks associate!
wit" an invest&ent in t"e co&%any#
Gse of ?rocee!s$ w"ic" !iscusses w"at t"e fun!s will be
use! for#
Selecte! -inancial =ata$ w"ic" %resents selecte! inco&e
state&ent an! balance s"eet !ata#
45
0anage&ent>s =iscussion an! 5nalysis of -inancial
4on!ition an! Eesults of 7%eration$ in w"ic" &anage&ent
!iscusses &aterial line ite&s in t"e Selecte! -inancial
=ata section an! w"y certain c"anges "ave occurre! over
t"e years re%orte!# 0anage&ent s"oul! also fully !isclose
known tren!s or uncertainties t"at coul! &aterially aAect
future nancial con!itions#
.usiness$ w"ic" %rovi!es an overview of t"e co&%any>s
business an! is broken !own into sub"ea!ings suc" as
J@n!ustryJ$ J?ro!uctsJ$ J0arketing an! =istributionJ$
JEesearc" an! =evelo%&entJ$ J0anufacturingJ$
J4o&%etitionJ$ J@ntellectual ?ro%erty 0attersJ$
JLitigationJ$ J3u&an EesourcesJ$ J-acilitiesJ$ etc# T"is
section is t"e central %art of t"e %ros%ectus# @t is
generally t"e rst section to be !rafte! an! is continuously
reworke! an! revise! until ling an! again$ t"roug"
a&en!&ents$ until t"e registration state&ent is !eclare!
eAective#
0anage&ent$ w"ic" lists t"e co&%any>s !irectors an!
e9ecutive oAicers an! t"en sets fort" in !etail
co&%ensation %ai! to its c"ief e9ecutive oAicer an! its
four ot"er &ost "ig"ly co&%ensate! e9ecutives#
4ertain transactions$ w"ic" sets fort" transactions$
inclu!ing t"e %rivate %lace&ent of securities$ involving t"e
co&%any an! its oAicers$ !irectors an! controlling
stock"ol!ers#
?rinci%al Stock"ol!ers$ w"ic" sets fort" t"e eBuity
"ol!ings of t"e co&%any>s controlling stock"ol!ers$
!irectors an! e9ecutive oAicers#
=escri%tion of 4a%ital Stock$ w"ic" !escribes t"e relative
%references an! %rivileges of t"e !iAerent classes of t"e
co&%any>s ca%ital stock u%on co&%letion of t"e @?7# @f t"e
46
co&%any "as a!o%te! t"e anti<takeover &easures
reference! above$ t"ey will be !isclose! in t"is section#
S"ares eligible for future sale$ w"ic" !iscloses t"e nu&ber
of s"ares$ "el! by e9isting s"are"ol!ers$ w"ic" will be
eligible for resale after t"e @?7 %ursuant to S84 Eules$
an! t"e ti&ing of suc" eligibility# T"is %rovision will also
!isclose any registration rig"ts t"at t"e e9isting
s"are"ol!ers &ay be contractually entitle! to#
Gn!erwriting$ t"is !escribes t"e ter&s of t"e un!erwriting
agree&ent#
5!!itional @nfor&ation$ w"ic" e9%lains t"at t"e %ros%ectus
is only %art of t"e registration state&ent an! "ow to
obtain fro& t"e S84#
-inancial State&ents$ w"ic" %rovi!e two years of au!ite!
balance s"eet !ata an! t"ree years of au!ite! inco&e
state&ent$ cas" Cow$ an! stock"ol!ers> eBuity !ata$ an!
une!ite! !ata for any subseBuent interi& %erio! an! t"e
co&%arable %erio! of t"e %rior year#
T"e working grou% will continuously &eet to revise t"e %ros%ectus at
!rafting sessions w"ic" generally take %lace at t"e oAices of co&%any
counsel# 7nce t"e grou% feels t"at t"e %ros%ectus is close to being
nal$ co&%any counsel will sen! it to t"e nancial %rinter on co&%uter
!isk$ w"ere it will be %rofessionally ty%e<set# ?rior to ling$ t"e
working grou% will &eet$ %ossibly several ti&es$ at t"e %rinter for nal
revisions#
2.).2 Lia/ilitie# and -ue -ili%ence
8ac" %artici%ant involve! in t"e %re%aration of t"e registration
state&ent can be "el! %ersonally liable for any &aterial
&isstate&ents or o&issions in t"e %ros%ectus# T"e liability can be
severe$ inclu!ing co&%lete restitution of t"e %rocee!s fro& t"e
oAering to t"e investors# K"ile t"e co&%any is "el! strictly liable for
41
suc" &isstate&ents or co&issions$ t"e un!erwriters an! in!ivi!ual
co&%any !irectors an! oAicers &ay raise a J!ue !iligence !efenceJ#
T"at is$ if t"e %artici%ants can %rove t"at t"ey &a!e a t"oroug" review
of every relevant as%ect of t"e co&%any an! still coul! not "ave
known of t"e inaccuracy$ t"ey will not be "el! liable# 4onseBuently$ a
consi!erable a&ount of ti&e is s%ent by eac" &e&ber of t"e working
grou%$ but %articularly by co&%any counsel an! un!erwriters> counsel$
interviewing co&%any &anage&ent$ reBuesting %ro!uction of all
cor%orate !ocu&ents an! &aterial contracts$ an! reviewing an!
!eter&ining w"ic" of t"ese !ocu&ents are &aterial an! nee! to be
!isclose!# T"is %rocess continues u% until t"e nal a&en!&ent to t"e
registration state&ent is le!#
2.).) T3e Re%i#tration Proce##
7nce t"e working grou% "as co&%lete! t"e registration state&ent an!
co&%ile! all of t"e e9"ibits$ co&%any counsel will instruct t"e
nancial %rinter to !eliver t"e a%%ro%riate nu&ber of co%ies to t"e
S84# T"e ling occurs u%on recei%t of t"e registration state&ent by
t"e S84# 5t t"e sa&e ti&e t"at t"e registration state&ent is le!$
co&%any counsel will also le t"e reBuest for con!ential treat&ent#
T"e registration state&ent will be assigne! to a branc" of t"e S84>s
=ivision of 4or%oration -inance u%on recei%t$ w"ere two e9a&iners
will be a%%ointe! to review it$ one to focus on nancial infor&ation
an! t"e ot"er on non<nancial infor&ation# Gsually wit"in 3* to 35
!ays$ t"e S84 will sen! a letter to t"e co&%any containing its
co&&ents to t"e registration state&ent$ t"e so<calle! Jco&&ent
letterJ# 6enerally$ eac" of t"e co&&ents &ust be a!!resse! t"roug"
a&en!&ent of t"e registration state&ent or t"e %rovision of a written
e9%lanation as to w"y an a&en!&ent is not necessary# 4o&%any
counsel generally calls t"e e9a&iner to !iscuss t"e co&&ents before
res%on!ing# 7nce eac" of t"e co&&ents "ave eit"er been a!!resse!
or waive!$ t"e a&en!e! registration state&ent is le! wit" a cover
4;
letter e9%laining t"e revisions wit" cross references to t"e co&&ent
letter# Puite often$ t"e S84 will sen! a follow u% co&&ent letter
stating w"ic" of t"e initial co&&ents it feels "ave not yet been
%ro%erly resolve! an!$ less freBuently$ containing a!!itional
co&&ents#
Gsually$ %rior to receiving co&&ents fro& t"e S84$ t"e %reli&inary
%ros%ectus is %rinte! in Buantity for !istribution by t"e un!erwriters#
7ccasionally$ t"e Buantity %rinting is !elaye! eit"er for new nancial
results to be inclu!e! or to receive initial S84 co&&ents#
2.).+ T3e ARed Herrin%A and t3e ARoad 13o!A
5s !iscusse! above$ after ling t"e registration state&ent$ t"e
co&%any an! its un!erwriters &ay &ake oral oAers$ ot"er t"an by use
of &ass &e!ia# Kritten oAers &ay only be &a!e t"roug" t"e use of
t"e %reli&inary %ros%ectus$ w"ic" is often referre! to as t"e Jre!
"erringJ$ because it contains on its cover a legen! %rinte! in re!
stating t"at oAers to buy &ay not be acce%te! nor sales &a!e %rior to
t"e eAectiveness of t"e registration state&ent#
T"e co&%any will generally launc" its &arketing ca&%aign wit" a
%ress release w"ic" is li&ite! in content %ursuant to S84 %er&its t"e
use of %ress releases w"ic" brieCy !escribe t"e oAering an! t"e
co&%any$ na&e t"e un!erwriters an! in!icate w"ere %ros%ectuses
&ay be obtaine!#
5fter t"e %ress release$ t"e co&%any an! lea! un!erwriters travel to
&a:or cities to %resent t"e co&%any an! its business to %otential
investors an! &e&bers of t"e un!erwriting syn!icate# T"ese
%resentations are referre! to as t"e Jroa! s"owJ or t"e J!og an! %ony
s"owJ# T"e co&%any>s &anage&ent &ay also sc"e!ule face to face
interviews wit" %otential large investors at t"is ti&e#
4)
2.)., T3e Under!ritin% A%reeent
?rior to ling t"e registration state&ent$ t"e &anaging un!erwriter
will %resent t"e co&%any wit" its for& of un!erwriting agree&ent#
T"e un!erwriting agree&ent sets fort" t"e relations"i% an! t"e legal
obligations between t"e co&%any$ t"e un!erwriters an! t"e selling
stock"ol!ers 'if any,$ suc" as 'i, t"e obligation of t"e un!erwriters to
buy t"e s"ares at a s%ecie! !iscount$ 'ii, t"e obligation of t"e
co&%any to rei&burse t"e un!erwriter for certain e9%enses$ 'iii,
re%resentations an! warranties of t"e co&%any$ 'iv, covenants of t"e
co&%any$ 'v, con!itions to closing$ 'vi, in!e&nication %rovisions
covering liability for &aterial &isstate&ents or o&issions in t"e
registration state&ent an! 'vii, occurrences w"ic" will allow t"e
un!erwriter to back out of t"e !eal %rior to closing$ suc" as wars$
stock &arket cras"es or$ in so&e agree&ents$ &a:or a!verse eAects to
t"e co&%any>s business# 5s !iscusse! above$ t"e un!erwriting
agree&ent is not signe! until after S84 clearance an! t"e co&%letion
of t"e Jroa! s"ow#J
T"e un!erwriting agree&ent will generally grant t"e un!erwriter an
o%tion to %urc"ase an a!!itional nu&ber of s"ares 'usually 15M of
w"at is being oAere!, in or!er to satisfy sales of s"ares by t"e
un!erwriter in e9cess of t"e nu&ber of s"ares being oAere!$ w"ic"
are referre! to as Jover<allot&entsJ or t"e Jgreen s"oe#J 7ver<
allot&ents are goo! for t"e after<&arket of t"e co&%any>s stock as
t"ey create increase! !e&an! for t"e s"ares# T"e un!erwriter is
generally allowe! to e9ercise t"is o%tion until t"irty !ays after t"e
closing#
K"en t"e nal un!erwriting agree&ent is signe!$ it will %rovi!e t"e
!ate of t"e closing of t"e sale of t"e s"ares to t"e un!erwriters$ w"ic"
is generally t"ree !ays after t"e agree&ent$ is e9ecute!#
2.).0 Re8ue#t &or Acceleration
5*
5t least two !ays before tra!ing co&&ences$ t"e co&%any an! t"e
un!erwriters &ust %rovi!e t"e S84 wit" acceleration reBuests$ asking
t"e S84 to accelerate t"e eAective !ate#
2.).2 Pricin% and E.ecti6ene##
?ro&%tly after t"e roa! s"ow is conclu!e! an! t"e registration
state&ent !eclare! eAective by t"e S84 'usually t"e sa&e !ay,$ but
%rior to signing t"e un!erwriting agree&ent$ t"e co&%any an! t"e
un!erwriters will &eet to negotiate t"e %rice of t"e s"ares# T"e
co&%any will be re%resente! by a %ricing co&&ittee$ w"ic" will "ave
been a%%ointe! by t"e boar! of !irectors$ an! certain &e&bers of t"e
un!erwriting syn!icate &ay %artici%ate as well# 5s !iscusse! above$
t"e un!erwriters an! t"e co&%any will "ave generally agree! to a
range of %rices as early as t"e kick<oA &eeting$ so t"e nal %rice
s"oul! not co&e as a sur%rise to anyone# 6enerally$ t"e un!erwriters
will %us" for a lower %rice t"an t"e co&%any>s %ricing co&&ittee$ as
t"ey will want a goo! rece%tion an! a strong i&&e!iate after<&arket
for t"e s"ares# 89ce%t for w"en t"e &arket is %articularly favourable$
t"e un!erwriters generally %revail in t"is negotiation#
T"e nig"t after t"e %ricing$ &e&bers of t"e working grou% will t"en
visit t"e %rinter once again to a!! t"e %ricing infor&ation to t"e nal
%ros%ectus# T"e nal %ros%ectus is t"en le! wit" t"e S84 an!
%rinte! in Buantity for !istribution by t"e un!erwriters to t"e
%urc"asers#
2.).5 Clo#in%
5s soon as t"e nal %ros%ectus "as been !isse&inate!$ or!ers for t"e
s"ares are acce%te! by t"e un!erwriters# Tra!ing begins on t"e
&orning following eAectiveness of t"e registration state&ent in
antici%ation of t"e closing# T"e closing is t"e !ate on w"ic" %ay&ent
is &a!e for t"e s"ares# T"e S84 reBuires t"e settle&ent of t"e @?7
wit"in t"ree business !ays of t"e %ricing#
51
5 variety of closing !eliveries are reBuire! un!er t"e un!erwriting
agree&ent$ inclu!ing counsel o%inions an! accountant co&fort letters#
T"e !ay before t"e closing$ co&%any counsel an! un!erwriter>s
counsel will generally &eet for a J%re<closingJ$ w"ere t"ey will review
t"e closing !ocu&ents#
T"e closing generally occurs in t"e &orning by conference call
between co&%any counsel$ un!erwriters> counsel an! t"e co&%any>s
new transfer agent# T"e co&%any counsel will conr& t"at it "as
receive! a c"eck or wire transfer fro& t"e un!erwriters for t"e
oAering %rice less !iscount an! t"at it consi!ers all of t"e con!itions
to closing to "ave been &et# Gn!erwriters> counsel will conr& t"at it
too consi!ers all of t"e con!itions to closing to "ave been &et# T"e
transfer agent will t"en !eclare t"e @?7 close! an! release t"e stock
certicates %er t"e instructions of t"e un!erwriters# @f t"e
un!erwriters "ave electe! to e9ercise t"e green s"oe o%tions$ t"e
over<allot&ent s"ares will be inclu!e! at t"is closingH ot"erwise$ t"ey
will be %urc"ase! at a subseBuent closing#
52
2.+ ?u#ti=cation o& t3e 1tud*
@nitial ?ublic 7Aering is not a new %"eno&enon in 2e%al# 5bout 15*
co&%anies "ave alrea!y gone to %ublic an! so&e co&%anies are in
line to go to t"e %ublic# T"is is a goo! sign to !evelo%&ent of t"e
2e%alese ca%ital &arket#
5t %resent$ t"ere are lots of researc"es t"at "ave been !one in t"e
to%ic of ca%ital &arket$ stock tra!ing &ec"anis&$ stock %ricing
be"aviours etc# .ut t"ere is still lack of researc" in t"e el! of @nitial
?ublic 7Aering to t"e stock invest&ent in 2e%al# T"is stu!y tries to
un!erstan! t"e %ace of initial %ublic oAering$ general investor>s
res%onse$ legal %rovisions etc#
T"is will be "el%ful to t"e issuing co&%anies$ issue &anagers$ stock
brokers$ general investors an! t"e new investors w"o wis" to
invest&ent t"roug" @nitial ?ublic 7Aerings#
53
CHAPTER-III
RESEARCH 5ETHODO+O=>
%.1 Introduct'on
Fesearch methodology is a systematic way to find out measures to the research problem.
It refers to the overall research process, which a research conducts during hisCher study. It
is necessary for the researcher to know not only the research methods but also the
methodology. It describes the methods and process applied in the entire aspect of the
study. Fesearch methodology refers to the various se)uential steps "along with a rational,
of each step# to be adopted by a researcher in studying a problem with certain ob!ect in
view "Jothari, 455>B45#. In other words research methodology is a systematize way to
solve the research problem. It consists of research design, nature and sources of data,
population and sample and financial tools.
%.! Re,earch De,'gn
The research design is one of the most important elements of the thesis. It is the out line
of the logic of the study. The research design is the outline of the plan to test the
hypothesis and should include all the procedures that follow.
The research design refers to the conceptual structure within which the research is
conducted. A well set of research design is necessary in order to make any type of
research which fulfills the ob!ective of the study. It includes nature of data, specification
of the methods of the proposed study and details plan for carrying out the study with
various empirical data for the analysis of problems etc. Thus the design is basically based
on presentation, analysis and interpretation of result. /irst the data are presented in table
"or diagram#. %econd presented data are analyzed by using various financial and
statistical tools and at last analyzed data are compared and interpreted for the conclusion.
%.% Po/u$at'on and Sa"/$e
The population for this study is the Initial (ublic *ffering made by various organizations
up to /= ;117C1@. There are one hundred fifty Companies listed in $epal %tock
&change 'imited. To find out the public response to the Initial (ublic *ffering, this
54
study has divided in two sectors as /inancial Institutions and Insurance %ector and $on
/inancial %ector. The population is shown clearly in the following table.
Ta#$e %.1
Po/u$at'on of the Stud
S. No. +',ted In,t'tut'on, Nu"#er
7'nanc'a$ In,t'tut'on, and In,urance Sector
4 Commercial 2anks 40
; 8evelopment 2anks ;6
6 /inance Companies 0@
> Insurance Companies 4@
Tota$ 2a3 11)
Non 7'nanc'a$ Sector
4 +anufacturing and (rocessing Co. ;4
; Trading Companies 0
6 <otels >
> *thers 9
Tota$ 2#3 %6
=rand Tota$ 2a?#3 1*1
Source: SEBON Annual Report
The samples are properly selected, the characteristics of the sample will reflect that the
population. 8ue to unavailability of reliable data this study has completed upon the base
of selected sample from each sectors. The sample have selected at random so that each
and every units of the population may have an e)ual and independent chance of being
selected. In this method, the selection of the units will totally depend upon the chance but
not on the discretion of anybody else. Among the 40 listed commercial bank, only 9 "i.e.
>1K# are taken as sample. In the case of development bank and finance companies 9 "i.e.
;6K# and 41 "i.e 47K# samples are taken from population of ;6 and 0@ respectively.
/rom 4@ insurance companies 9 "i.e. 66K# are taken as sample. /rom non-financial
55
sector altogether 5 companies are taken as sample from 69 companies "i.e. ;0 K#. The
selected samples are shown in the following table.
Ta#$e %.!
Sa"/$e ,e$ected fro" the /o/u$at'on
S. No. In,t'tut'on, Po/u$at'on
Sa"/$e
S'-e
Sa"/$e @
2A//ro4'"at
e$3
7'nanc'a$ In,t'tut'on, and In,urance Sector,
4. Commercial 2anks 40 9 >1
;. 8evelopment 2anks ;6 9 ;9
6. /inance Companies 0@ 41 47
>. Insurance Companies 4@ 9 66
Tota$ A 11) !: !*
Non 7'nanc'a$ Sector,
0. +anufacturing and (rocessing Co. ;4 0 ;>
9. Trading Companies 0 4 ;1
7. <otels > 4 ;0
@. *thers 9 ; 66
Tota$ B %6 ; ;0
Tota$2A?B3 1*1 %9 !*
Source: SEBON Annual Report
%.) Source, of Data
/or the re)uirement of the research a )uestionnaire was designed having 40 )uestions for
the primary data collection. *ne hundred and fifty respondents "students, bankers,
brokers, and others# were asked to fill the )uestionnaire. /or the secondary data
collection data from $I8C Capital +arket, Citizen Investment Trust "CIT#, and $+2
2ank have been approached. At the same time, data from Annual Feport of %ecurity
2oard of $epal for /iscal =ear ;117C;11@ has also been taken.
%.* Ana$,', of Data
8ata analysis helps to present the study. Analysis of data is done carefully of available
facts. 2oth primary as well as secondary data have been used for the research.
%.6 Stat',t'ca$ Too$,
%uitable statistical tools are used to implicit the comparative results as re)uired.
%.6.1 5u$t'/$e Bar- d'agra", and =ra/h,
56
8iagrams and graphs are visual aids which give a birdIs eye view of a set of numerical
data which show the information in a way that enables us to make comparison between
two or more than two sets of data. 8iagrams are in different types. *ut of these various
types of diagram one of the most important form of diagrammatic presentation of data is
multiple bar diagram which is used in cases where multiple characteristics of the same set
of data have to be presented and compared.
%.6.! P'e - d'agra"
A pie- diagram is a widely used aid that is generally used for diagrammatic presentation
of the values differing widely in magnitude. In this method all the given data are
converted into 691 degree as the angel of a circle is 691 degree and all components of the
data are presented in terms of angels that total 691 degree for one set of data.
%.6.% Percentage
(ercentage is one of the most useful tools for the comparison of two )uantities or
variables. %imply, the word percentage means per hundred. In other words, the fraction
with 411 as its denominator is known as a percentage and the numerator of this fraction is
known as rate of percent.
%.6.) S'"/$e Ar'th"et'c 5ean 2A(erage3
%imple arithmetic mean is the sum of the values of all the elements in the sample "&#
and divides by the number of elements in the sample.
N
x
X

=
+ean L
%um of total values
$umber of values
51
CHAPTER - I0
DATA PRESENTATION A ANA+>SIS
Introduct'on
This chapter includes presentation of data and analysis of data to reach at a conclusion.
The primary data are used to analyze the public awareness, response, epectation, choice
for investment etc. The secondary data are used to analyze the public response to the
initial public offering per year and sector wise along with under subscription and
oversubscription, growth of public offering and the behavior of general investors.
The collected data are tested through suitable statistical tools. Collected data have been
analyzed as in percentage, simple average, and correlation coefficient of two variables.
The purpose of the analyses is to achieve the ob!ectives set in the chapter one.
).1 Secondar Data Ana$,',
).1.1 A"ount of I,,ue A//ro(ed
The %ecurities &change Act, 4596 has made mandatory that the issuing company should
register the securities in %ecurity 2oard of $epal "%&2*$# and get approval before going
to public. /or registration the company must submit its memorandum and prospectus with
other securities related documents within prescribed format. After registering the
securities the company must inform about any allotment or sale within seven days of
allotment or sale. If the company is going to sell securities to more than 01 persons at
once, it must publish this information for public purpose. The provisions regarding
application period price and allotment are as per specification made by %&2*$. The
issuing company must publish its prospectus after approval of %&2*$ at any easily
assessable media for public purpose. The prospectus should consist of general
information of company, capital, its product, and services, legal provisions, economic
conditions of issuing authority, management, information regarding its promoters.
/rom the fiscal year 4556C5> to ;117C1@ %&2*$ has approved ;91 issues of securities
amounting to Fs.;;094.4@ million. The detail situation of issue approved in different year
is presented in the table >.4
5;
Ta#$e. ).1
A"ount of ',,ue a//ro(ed
>ear A//ro(ed 2R,. 'n 5'$$'on3 @ of I,,ue A//ro(ed
4556C5> ;>>.> 4.1@
455>C50 476.59 1.77
4550C59 ;56.7> 4.61
4559C57 66;.; 4.>7
4557C5@ >9;.69 ;.10
455@C55 ;0@ 4.4>
4555C11 6;9.@9 4.>0
;111C14 >41.>5 4.@;
;114C1; 4>>4.66 9.65
;11;C16 009.0> ;.>7
;116C1> 41;7.0 >.00
;11>C10 49;9.@; 7.;4
;110C19 ;>>6.;@ 41.@6
;119C17 ;;50.0 41.47
;117C1@ 4199@.; >7.;5
Tota$ !!*61.1: 111.11
Source: SEBON Annual Report
7'gure. ).1
The table >.4 and figure >.4 shows the securities issue amount approved by %&2*C$ vary
during the period. The highest amount of issue approved was Fs.4199@.; million in the
fiscal year ;117C@, which is >7.;5 percentage of total issue till date. This is mainly
because of I(*s and Fight issues made by financial sector. They have been issuing shares
to fulfill capital re)uirement obligations enforced by central bank.
5)
8uring last five years approved amount are in growing trend despite is fiscal year
;119C17, which indicates that companies are now interested in public offering of
securities and right issues. 2efore the year ;114C1; issue amount is )uite consistent and
hovering around 401 million to >11 million. 8uring this period $epalese capital market
was not so popular among investors. *nly few investors of Jathmandu valley were
trading. 2ut, after ;11;C16 more and more people entered in market. %pecially, people
who have been hard hit by +aoist peopleIs war found capital market as a good shelter for
their money.
).1.! Nu"#er of I,,ue A//ro(ed
The number of issue approved is the total number of issue approved by the %ecurity
2oard of $epal. 2efore issuing securities, the issuing company must make approval from
%ecurity 2oard of $epal "%&2*$#. /or issue approval and registration, the company
must submit re)uited information within prescribed format otherwise %&2*$ may re!ect
it. After registration and issue approval, the company must open issue within three month
of issue approval. In case if the issue couldn't be made, then after another date should be
fied consulting with %&2*. The advertisement for application should be published in
national daily news paper, the advertisement should consist all actual and real
information. The advertisement should be able to identify application collection centre
and its duration.
The number of issue approved during the period of 4556C5> to ;117C1@ varies differently
which is presented in the table >.;
6*
Ta#$e. ).!
Nu"#er of I,,ue A//ro(ed ,'nce 1;;%B;) to !119B1:
Source: SEBON Annual Report
7'gure. ).!
>ear No. of ',,ue a//ro(ed @ of ',,ue a//ro(ed
4556C5> 49 9.40
455>C50 41 6.@0
4550C59 4; >.9;
4559C57 0 4.5;
4557C5@ 4; >.9;
455@C55 0 4.5;
4555C11 9 ;.64
;111C14 5 6.>9
;114C1; 4; >.9;
;11;C16 4@ 9.5;
;116C1> 4> 0.6@
;11>C10 4> 0.6@
;110C19 ;5 44.40
;119C17 6> 46.1@
;117C1@ 9> ;>.9;
Tota$ !61 111.11
61
Table >.; and /igure >.; depict number of issues approved. The numbers of issues
approved were 49 in fiscal year 4556C5> but at the end of fiscal year ;117C1@ the total
number of approved issue was reached to the point of ;91 issues. The highest number of
issue approved till date is 9> that is almost twice of previous year figure. *ver the five
years period number of issues has increase significantly. This is because of establishment
of new financial institution. 2efore /= ;116C1> number of issues are varying every were
showing inconsistency.
).1.% R'ght offer'ng ,'nce 1;;%B;) to !119B1:
The number of right offering during the period of 4556C5> to ;117C1@ varies differently
which is presented in the table below.
Ta#$e-).%
R'ght offer'ng ,'nce 1;;%B;) to !119B1:
7',ca$ ear
No of I,,ue
A//ro(ed
I,,ue A//ro(ed
2R,. 'n 5'$$'on3
Percentage of
Tota$ A//ro(a$
4556C5> - - -
455>C50 - - -
4550C59 ; 95 1.05
4559C57 6 ;70.; ;.6>
4557C5@ 6 ;>5.59 ;.46
455@C55 4 61 1.;9
4555C11 6 4;>.9 4.19
;111C14 ; 464.75 4.4;
;114C1; 0 9;4.@7 0.;5
;11;C16 > 49;.;> 4.6@
;116C1> 6 71 1.91
;11>C10 9 5>5.6> @.1@
;110C19 44 4146.>0 @.9;
;119C17 47 4;90.6 41.79
;117C1@ >6 9756.> 07.75
Tota$ 11% 119*6.1* 111.11
Source: SEBON Annual Report
62
7'gure. ).%
Table >.6 and figure >.6 shows the right offering of different companies during
4556C5> to ;117C1@. In the year 4556C5> and 455>C50 there were no any right
offering. The year ;117C@ has the highest offering at that time >; companies
comprising @ commercial 2ank, 44 developments 2anks, ;1 finance companies and
6 insurance companies issued right shares amounting to Fs.9756.> million. The year
455@C55 has the lowest right offering "i.e. 61 million#. In other periods the issued
amount is moderate or fluctuating.
).1.) O(er and Under Su#,cr'/t'on of Secur't'e,
At the time of issue the demand for securities may be greater or lesser than the issuing
amount. .hen the demand of securities is higher than issued securities, the situation is
called the case of oversubscription but if the demand of securities is lower than issued
securities that situation is called under subscription of securities. 2elow table >.> shows
the oversubscription M under subscription of different companies from year 4556C5> to
;117C1@, while issuing their *rdinary share to general public.
63
Ta#$e. ).)
O(er and Under Su#,cr'/t'on of Secur't'e, ,'nce 1;;%B;) to !119B1:
=ear $o. of
issued
Co.
*ver subscribed Co. ?nder
%ubscribed Co.
Constant
$o. percentage $o. K $o. K
4556C5> 4> 4> 411K 1 1 1 1
455>C50 41 @ @1K 1 1 ; ;1K
4550C59 41 0 01K 0 01K 1 1
4559C57 ; ; 411K 1 1 1 1
4557C5@ @ 9 70K 4 4;.01K 4 4;.01K
455@C55 6 6 411K 1 1 1 1
4555C11 6 6 411K 1 1 1 1
;111C14 7 7 411K 1 1 1 1
;114C1; 0 > @1K 4 ;1K 1 1
;11;C16 4> 4> 411K 1 1 1 1
;116C1> 41 41 411K 1 1 1 1
;11>C10 7 9 @0.74K 4 4>.;5K 1 1
;110C19 4> 4> 411K 1 1 1 1
;119C17 40 40 411K 1 1 1 1
;117C1@ 49 49 411K 1 1 1 1
Tota$ 1%: 1!9 ;!.1%@ : *.:1@ % !.19@
Source: SEBON Annual Report
The table >.> shows that during the period of /iscal =ear 4556C5> to ;117C1@ out of the
total listed companies only 46@ companies issued their common stock for public and
among them 4;7 companies "5;.16K# have been oversubscribed and @ companies
"0.@1K# have been undersubscribed and remaining 6 companies ";.47K# issue have been
fully subscribed. /urthermore, those companies who issued shares to public in fiscal year
455>C50, 4550C59, 4557C5@, ;114C1;, ;11>C10 were under subscribed. In these years
issues of both financial and non-financial sectors were undersubscribed due to different
reasons i.e. lack of information, limited number of investors etc. %imilarly, all those
companies who issued their common stock in /iscal =ear 4556C5>, 4559C57, 455@C55,
4555C11, ;111C14, ;11;C16, ;116C1>, ;110C19, ;119C17, ;117C1@, have been
oversubscribed.
).1.* Secur't'e, 8',e Ana$,',
The security wise analysis of ordinary shares, right shares, preference shares and
debenture with the amount is shown in the table >.0 below.
64
Ta#$e. ).*
Secur't'e, 8',e ana$,', dur'ng f',ca$ ear 1;;%B;) to !119B1:
T/e, of Secur't'e,
Nu"#er of
',,ue A//ro(ed
A"ount 2R, 'n "'$$'on3
*rdinary %hares 46@ 0,190.@1
Fight %hares 416 44,709.41
(reference %hares 0 969.01
8ebentures 4> 0,416.11
Tota$ !61 !!C*61.)1
Source: SEBON Annual Report
7'gure. ).)
Table >.0 and figure >.> shows securities wise analysis during 4556C5> to ;117C1@. *ut of
different ;91 issues, 46@ issues were ordinary shares of the total amount of Fs.0,190.@1
million i.e. ;;.>0K, 416 issues were right shares of the total amount of Fs.44,700.51
million i.e.0;.40K, 0 issues were preference shares of the total amount of Fs.969.71
million i.e.;.@1K and 4> issues were debentures of the total amount of Fs.0,416 million
i.e.;;.91K.
65
).1.6 >ear D',e Ana$,', of D'fferent Secur't'e, 8'th the'r Nu"#er and A"ount
The year wise analysis of different securities issued from the fiscal year 4556C5> to the
fiscal year ;117C1@ is shown in the table >.9 below.
Ta#$e. ).6
>ear 8',e ana$,', of d'fferent ,ecur't'e, 8'th the'r nu"#er and a"ount
>ear Ord'nar Share R'ght Share Preference Share De#enture
$umber Amount $umber Amount $umber Amount $umber Amount
4556C5> 4>
;;7.5 - - ; 49.0 - -
455>C50 41
476.56 - - - - - -
4550C59 41
;;>.7> ; 95 - - - -
4559C57 ;
07 6 ;70.; - - - -
4557C5@ @
445.> 6 ;>5.59 - - 4 56
455@C55 6
4>@ 4 61 4 @1 - -
4555C11 6
;1;.;9 6 4;>.9 - - - -
;111C14 7
;7@.7 ; 464.75 - - - -
;114C1; 0
645.>9 0 9;4.@7 4 4>1 4 691
;11;C16 4>
65>.6 > 49;.;> - - - -
;116C1> 41
907.0 6 71 - - 4 611
;11>C10 7
677.>@ 9 5>5.6> - - 4 611
;110C19 4>
075.@6 44 4146.>0 - - > @01
;119C17 40
6@1.6 47 4;90.6 4 >11 4 ;01
;117C1@ 49
5;>.@ >6 9756.> - - 0 ;501
Tota$ 46@ 0190.@1 416 44709.4 0 969.0 4> 0416
Source: Annual Report of SEBON
7'gure. ).*
66
Table >.9 and figure >.0 show year wise analysis of different securities with their number
and amount since 4556C5> to ;117C1@. In fiscal year 4556C5> out of 49 different issues, 4>
issues were ordinary shares of total amount of Fs.;;7.5 and ; issues were preference
shares of total amount of Fs.49.01 million. In the fiscal year 455>C50 out of 41 different
issues, all 41 issues were ordinary shares total amount of Fs.476.59 million. In the fiscal
year 4550C59 out of different 4; issues, 41 issues were ordinary shares of the total amount
of Fs.;;>.7> and ; issues were right shares of the total amount of Fs.95 million. In the
fiscal year 4559C57 out of different 0 issues, ; issues were ordinary shares of the total
amount of Fs.07 million and 6 issues were right shares of the total amount of Fs.;70.;1
million. In the fiscal 4557C5@ out of different 4; issues @ issues were ordinary shares of
the total amount of Fs.445.> million, 6 issues were right shares of the total amount of
Fs.;>5.59 million and 4 issue was debenture of the total amount of Fs.56 million. In the
fiscal year 455@C55 out of different 0 issues 6 issues were ordinary shares of the total
amount of Fs.4>@ million, 4 issue was preference shares of the total amount of Fs.@1
million and 4 issue was right shares of the total amount of Fs.61 million, in the fiscal year
4555C;111 out of different 9 issues 6 issues were ordinary shares of the total amount of
Fs.;1;.;9 million and 6 issues were right shares of Fs.4;>.9million. %imilarly in fiscal
year ;111C14 out of 5 issues 7 issues were ordinary shares of Fs;7@.7 million and ;
issues were right shares of Fs464.75million.In the fiscal year ;114C1; out of 4; issues
0 issues were ordinary shares,4 issue was preference shares,0 issues were right shares,
and 4 issues has issued debenture of Fs.645.>9million, Fs.9;4.@7million,Fs4>1
million,Fs691million respectively. 'ikewise, in the fiscal year ;11;C16 out of 4@ issues
4> issues were ordinary shares of Fs.65>.6million and > issues has issued right shares of
Fs.49;.;> million. In fiscal year ;116C1> out of 4> issues 41 issues were ordinary shares,
6 issues were right shares and 4 issue was debenture of Fs.907.0million, Fs.71million,
and Fs.611million respectively. In the fiscal year ;11>C10 out of 4> issues 7 issues were
ordinary shares of Fs677.>@ million, 9 issues were right shares of Fs.5>5.6>million and 4
issue was debenture of Fs.611million .In fiscal year ;110C19 out of ;5 issues 4> issues
were ordinary shares, 44 issues were right shares and > issues were debenture of
Fs.075.@5million, Fs4146.>0million and Fs.@01 million respectively. In the fiscal year
;119C17 out of 6> issues, 40 issues were ordinary shares, 47 were right shares, 4 was
preference share, and another 4 was debenture of Fs.6@1.6million, Fs.4;90.6million,
Fs.>11million, and Fs.;01million respectively. And in the year ;117C1@, out of 9> issues
61
49 were ordinary shares of Fs.5;>.@million, >6 issues were right shares of
Fs.9756.>million and 0 issues debenture of Fs.;501million.
).! Pu#$'c Re,/on,e to In't'a$ Pu#$'c Offer'ng
The total listed companies are divided into eight sectors by $epal %tock &change
'imited. which are Commercial 2anks, /inance Companies, 8evelopment 2anks,
Insurance Companies, +anufacturing M (rocessing Companies, Trading Companies,
<otels and *thers sector. Investors have to decide in which sector they want to made
investment. As per ob!ective, this study only concerned with the investors priority and
response for the Initial (ublic *ffering.
).!.1 Pu#$'c Re,/on,e to 7'nanc'a$ Sector
/inancial %ector includes commercial banks, development banks, finance companies,
insurance companies. Fesponses to the financial sector are presented below.
).!.1.1 Pu#$'c Re,/on,e to Co""erc'a$ Bank,
According to the %&2*$ Annual Feport ;117C1@, there are 40 commercial 2anks which
are listed in %tock &change. All of these had issued their %hare to public. $epal Arab
2ank 'imited "$A2I' 2ank# is the first commercial bank to issue %hare to public. (ublic
issues of commercial bank are highly appreciated by public. Investors give high priority
and response to the public issue. /rom the population of all total of 40 only 9 are taken as
sample.
Ta#$e ).9
Pu#$'c Re,/on,e to Co""erc'a$ Bank,
S.N.
Na"e of
Co"/an'e,
I,,ued
>ear
No. of
Share,
Share,
A//$'ed
Su#.
T'"e,
Re,u$t
4
$epal %2I
2ank
455> 691111 0109>49 4>.1>09
*ver
%ubscribed
;
2ank of
Jatmandu.
4559 >01111 ;>46>@0 0.6966
*ver
%ubscribed
6
&verest
2ank.
4550 691111 4@04991 0.4>60
*ver
%ubscribed
> Jumari 2ank ;116 4011111 4;471;01 @.4460
*ver
%ubscribed
0
%iddhartha
2ank
;110 4011111 ;7575501 4@.9066
*ver
%ubscribed
9 Elobal 2ank ;11@ 6111111 41;701111 6>.;0 *ver
6;
%ubscribed
Source: NMB, CIT, NCML
The above table >.7 shows the information of si different commercial banks with their
number of shares issued and number of applications applied by the general public to the
company. The public response to these companies is also shown.
$epal %2I 2ank 'imited had issued 691,111 units share to the public. 2ut the demand of
the share of this company was 0,109,>49 ?nits. %ubscription was approimately 4>.1>
times more than issue size. It means investors gave high response to this company. 2ank
of Jathmandu 'imited had issued >01,111 units %hare to the public. The investors
applied for ;,>46,>@0 ?nits %hare. %ubscription was approimately 0.69 times. This
shows the medium response of the investors to the company. %imilarly, &verest 2ank
issued 691,111 ?nits %hare to the public. (ublic applied for 4,@04,991 ?nits %hare.
%ubscription was approimately 0.4> times. (ublic response to this bank was also
medium. 'ike the way %iddhartha 2ank and kumari 2ank both issued 40,11,111 units of
shares. The investor applied for ;7,575,501 units and 4;,471,;01 units for %iddhartha
2ank and Jumari 2ank respectively. %ubscription was approimately 4@.90 times and
@.44 times for %iddhartha 2ank and kumari 2ank respectively. %imilarly, Elobal 2ank
'imited issued 6,111,111 ?nits %hares for public. The applied ?nits were 41;,701,111
which very above the issue size. %ubscription was about 6>.;0 times. (ublic response to
this company can be considered to be Dery <igh.
Table >.7 also shows that investors are more interested to purchase the shares of
commercial banks. 2anking sectors of $epal seems to be more successful to attract the
investors. The above information is also shown in the figure >.9.
7'gure. ).6
6)
).!.1.! Pu#$'c Re,/on,e to De(e$o/"ent Bank,
To analyze the public response to development banks, si companies are chosen as
sample, which are shown in the following table below.
Ta#$e-).:
Pu#$'c Re,/on,e to De(e$o/"ent Bank,
S.N.
Na"e of the
Co"/an
I,,ue
d
>ear
No of
Share,
Share,
A//$'ed
Su#.
T'"e,
Re,u$t
4 8C2' ;11; >@1,111 9,799,91@ 4>.1574
*ver
%ubscribed
;
$irdhan ?tthan
2ank
;116 66111 4;@1@1 6.@@4;
*ver
%ubscribed
6
8epro
8evelopment 2ank
;110 6>,@11 51,;01 ;.056>
*ver
%ubscribed
>
%idhartha 2ikash
2ank 'td.
;119 ;11111 >>>@91 ;.;;>6
*ver
%ubscribed
0 +alika 2ikash 2ank ;117 401111 @,;;9,111 0>.@>
*ver
%ubscribed
9
Clean &neggy
8evelopment 2ank
;11@ 591111 6,011,491 69.>9
*ver
%ubscribed
Source: NMB, CIT, NCML
7'gure. ).9
1*
All the public issue of development banks we found over subscription all the time. That
means public are also interested in development banks shares. Among them +alika
2ikash 2ank was highly subscribed in ;117, the subscription time was 0>.@>.
8evelopment Credit 2ank issued >@1111 ?nits shares to the public. 2ut the demand of
the share of this company was 9,799,91@ ?nits. %ubscription was approimately 4>.1574
times more than issue size. It means investors gave high response to this company.
$irdhan ?tthan 2ank had issued 66,111 units shares to the public. The investors applied
for 4;@,1@1 unit shares. %ubscription was 6.@@4; times. This shows the response of the
investors to the company was medium. %ame way %idhartha bikash 2ank issued ;11,111
units of shares but the demand was >>>,@91 units. %ubscription was approimately ;.;;>6
times. %imilarly in year ;11@ Clean &nergy 8evelopment 2ank issued 591,111 units of
shares but the demand was approimately 69.>9 times more. That is public applied for
6,011,491 units of shares. This also shows a very high level of subscription like +alika
2ikash 2ank in ;117.
).!.1.% Pu#$'c Re,/on,e to 7'nance Co"/an'e,
There are 0@ /inance companies which had issued share to the public and listed in the
$epal %tock &change 'imited. Almost of these companies received good response from
general public. Among 0@ /inance Companies 41 are taken for public response.
11
Ta#$e-).;
Pu#$'c Re,/on,e to 7'nance Co"/an'e,
S.N. Na"e of Co"/an'e, I,,ued
>ear
No of
Share,
Share,
A//$'ed
Su#,.
T'"e, Re,u$t
4 (eoples /inance 455> 5@111 40@@;79 49.;195
*ver
%ubscribed
; Ace /inance Company 4559 4;1111 4>>@79 4.;176
*ver
%ubscribed
6 +ahalami /inance 455@ 411111 4@@0;1 4.@@0;
*ver
%ubscribed
> (aschimanchal /inance 455@ @1111 467>>1 4.74@1
*ver
%ubscribed
0 (okhara /inance 4555 @1111 ;4;911 ;.9070
*ver
%ubscribed
9 ?nion /inance ;11; ;>1111 ;41@469 @.7@65
*ver
%ubscribed
7
Cosmic +erchant
2anking M /inance
;116 ;>1111 47;;75; 7.47@6
*ver
%ubscribed
@ 2irgan! /inance ;11> ;>1111 495170; 7.1>>@
*ver
%ubscribed
5
Foyal +erchant 2anking
M /inance
;119 470111 >50770 ;.@661
*ver
%ubscribed
41 Jaski /inance ;11@ ;11111 >6@9111 ;4.56
*ver
%ubscribed
Source: NMB, CIT, NCML
7'gure. ).:
12
The above table >.5 and bar figure >.@ show the status of I(* of different finance
company over the same period. All the I(*Is presented in the table are oversubscribed
that shows the popularity of I(* made by finance companies. Among these companies
three companies viz. ?nion /inance Company "?/'#Is I(* are highest ";>1,111#. These
I(*Is were highly oversubscribed by @.7@, 7.47 M 7.10 times respectively. According to
the table Jaski /inanceIs I(* was highly oversubscribed ";; times#. %imilarly, (eopleIs
/inance CompanyIs I(* was oversubscribed by 49 times. (eopleIs I(* was lower than
JaskiIs I(*. (/' issued 51,111 shares while J/' issues ;11,111 shares. *ut of the 41
I(*Is AC&Is I(* received lowest attention from public, although it was oversubscribed
by 4.;4 times. Ace issued 4@1,111 shares but received applications for 4>>,@79 shares.
Among these 41 finance company I(*, two I(*s were highly oversubscribed ";; M 49
times#, whereas three had medium public response "7 to 5 times# and five I(*Is have
lower oversubscription rate "more than one to 6 times#. This shows that investors are
more interested to purchase the shares of finance companies. /inance companies are also
getting successful to attract investors.
).!.1.) Pu#$'c Re,/on,e to In,urance Co"/an'e,
*ut of 4@ insurance companies, 9 were taken for research. .hich are shown in the
following table >.41
Ta#$e-).11
Pu#$'c Re,/on,e to In,urance Co"/an
S.N
.
Na"e of Co"/an'e, I,,ued
>ear
No of
I,,ued
Share,
Share,
A//$'ed
Su#,.
T'"e,
Pu#$'c
Re,/on,e
4 ?nited Insurance Co. 'td 455> ;>1111 4109691 >.>140
*ver
%ubscribed
;
&verest Insurance Co.
'td.
455> 4;1111 461409@ 41.@>9>
*ver
%ubscribed
6 $.2. Insurance Co. 'td ;116 ;11111 ;906@1 4.6;95
*ver
%ubscribed
>
(rudential Insurance Co.
'td.
;11> ;11111 45469;1 5.09@4
*ver
%ubscribed
0
%hikhar Insurance Co.
'td.
;119 ;01111 41565901 >6.70@9
*ver
%ubscribed
9.
%iddhartha Insurance Co.
'td.
;117 ;01111 40407011 91.96
*ver
%ubscribed
%ourceB CIT, $%+', $C+', $+2
13
7'gure. ).;
The above table >.41 and figure >.5 shows the public response to si different insurance
companies with issued and applied number of shares. According to the table all si I(*s
were oversubscribed. Table shows that among si insurance companies three had medium
public response ">.>, 5.07, and 41.@0 times#, one had low level "4.66 times#
oversubscription rate and two have high oversubscription rate ">6.79 and 91.96 times#.
This shows that investors are more interested to purchase the shares of insurance
companies. %<IC' and %IC' both received flood of application when they floated
;01,111 shares in the year ;119 and year ;117 respectively. %<IC' received applications
for 41,565,901 shares which were >6.79 times of its issues. %imilarly, %IC' received
application for 40,407,011 shares in response of 601, 111: 91.96 times more than that
issued shares. The main factor behind this oversubscription was management and 2*8 of
the companies and market sentiment. .ell-known personalities of financial sector were
involved in these companies and the stock market was in boom at that time. Contrary to
these issues, $2IC' received ;90,6@1 shares for its ;11,111 issue, !ust 4.66 times more
than its size. 2ecause of the promoters bad reputation in market it received few
applications. &IC' received 41.@0 times more applications and (IC' received 5.07 times
more applications and ?IC' received >.>1 times more application. ?IC' and &IC'
floated shares in 455>, at that time $epalese security market was in its initial stage. +any
people were not aware of I(*Is and shares but these issues were acclaimed by investor
14
that is because of the promoters and management team. These two issues made )uite easy
for (IC' to raise capital through I(*.
).!.! Pu#$'c Re,/on,e to Non 7'nanc'a$ Sector
In $epalese contet, non financial sector does not seem to be performing well in the
market in comparison to financial sector. +any such companies are not able to make
profit. %ome companies, like $econ Air 'imited, were already dissolved. $on-/inancial
%ector includes manufacturing and processing companies, trading companies, hotels and
others "which also include hydropower sector#. ?p to the fiscal year ;117C1@ end, there
are 69 non financial %ector companies listed. Among them 5 are taken for research.
Ta#$e ).11
Pu#$'c Re,/on,e to Non 7'nanc'a$ Sector,
S.N. Na"e of Co"/an'e, I,,ued
>ear
I,,ued
No of
Share,
Share,
A//$'ed
Su#,.
T'"e,
Pu#$'c
Re,/on,e
4
<arisiddhi 2rick M Tile
fatory 'td.
4556 06;,111 4,0>4,@59 ;.@5@6
*ver
%ubscribed
; ?niliver $epal 'td. 455> 46@,111 514,@>> 9.0604
*ver
%ubscribed
6
<imgiri Tetile
Industries 'td.
455> 45;,111 614,40; 4.09@0
*ver
%ubscribed
> $econ Air 'td. 455> 490,111 0@@,>17 6.0994
*ver
%ubscribed
0
%hreeram %ugar +ills
'td.
4557 >90,111 ;>0,5@0 1.0;51
?nder
%ubscribed
9 *riental <otels 'td. ;111 4,011,111 5,>;5,111 9.;@91
*ver
%ubscribed
7
<imalayan 8istillery
'td.
;114 4,76>,911 4@6,6>7 1.4107
?nder
%ubscribed
@
$ational <ydro (ower
Co. 'td.
;11> 4,>11,111 614,711 1.;400
?nder
%ubscribed
5
Chilime <ydro (ower
Co. 'td.
;110 ;,67>,411 4;,41>,444 0.15@>
*ver
%ubscribed
%ourceB CIT, $%+', $C+', $+2
15
7'gure. ).11
The above table >.44 and figure >.41 shows that the subscription of three companies are
under subscribed and rest 9 companies are over-subscribed. <arisiddhi 2rick M Tile
/actory 'td. had issued 06;,111 unit shares and had received application for 4,0>4,@59
unit shares. The public response to this company was medium with ;.@5@6 times
subscription. ?niliver $epal 'td. and <imgiri Tetile Industries 'td. issued 46@,111 units
and 45;111 units shares, had received application for 514,@>> units M 614,40; shares.
The response to these companies was also medium with 9.0604 M 4.09@0 times
respectively. $econ Air 'imited issued 490,111 unit shares for which application was
received for 0@@,>17 unit shares. This shows the subscription times to be 6.0994 and
hence the public response was medium. 'ikewise, the public response was medium to the
*riental <otels with subscription of 9.;@91 times. This company had issued 4,011,111
unit shares and had received application for 5,>;5111 unit shares. %hreeram %ugar +ills
'td. had issued >90,111 unit shares and had received application for ;>0,5@0 unit shares.
The public response to this company was too low with 1.0;51 times subscription.
%imilarly <imalayan 8istilary 'td. and $ational <ydropower Company 'td. issued
4,76>,911 units M 4,>11,111 units shares and had received application for 4@6,6>7 units
M 614,711 shares. The responses to these companies were too low with 1.4107M 1.;400
times respectively.
16
Chilime <ydropower Company 'td. had issued ;,67>,411 unit shares and had received
application for 4;,41>,444unit shares. The public response to this company was medium
with 0.15@> times subscription.
).% 5a&or 7'nd'ng, on Secondar Data
The secondary data was taken to !ustify of the research on the topic. The ma!or findings
on secondary data are as followsB
In the present circumstance, a single investor or a group of investor can adversely
affect the market scenario. This is an underprivileged signal to the development of
capital market.
In a year ;117C1@, maimum, 9> companies have got approval from %&2*$.
+inimum 0 companies have got approved from %&2*$ in each of the year
4559C57, 455@C55.
(ublic response to the financial institutions and insurance sectors is higher than
non financial sectors.
In the year 4550C59 it was poor response to primary issues. +a!or causes for poor
response in that period wereB interest rates were higher as compared to dividend
yield, also the public companies were not performing well, and people did not
know about the importance of investing in securities.
In financial intuitions and insurance sector, the subscription of commercial banks
were 4>.;9 times in average, and of development banks was 45.1; times in
average. This shows the public response to development banks were greater or
more than commercial banks. (ast data shows that the average subscription of
finance companies was 7.4> times while average subscription of insurance
company was ;4.79 times. .hich shows the most responded sector was insurance
sector.
In the non financial institutions the average subscription was ;.5@ times. It shows
non financial sector has got not such better response from the public. 'ast few
years' eperience shows that there are limited non financial sectors available in the
country.
$ow-a-days the public response is highly positive , because people are aware,
money flow in the market is higher, people now realize the importance of share
11
investment, people have seen that most companies are distributing dividends, and
lack of better alternatives for investment.
8uring the research period, Asian 'ife Insurance and Jasthamandap 8evelopment
2ank 'td. had issued their issued to the public and were significantly over
subscribed by >0 times and 01 times respectively.
).) Ana$,', of Pr'"ar Data
To make the study more realistic primary data has been taken for analysis. /or this
purpose a )uestionnaire "see appendi# was designed. Nuestionnaire was distributed to
401 respondents "students, businessmen, bankers, brokers, and others# for their responses.
Among the 401 respondents for the primary data collection, ;1K"61# are students,
>1K"91# are businessman, 49.97K";0# are bankers, 6.66K"0# are brokers and rest
;1K"61# are others.
Investors have mied feelings on the primary market in $epal. /or the primary data
collection 401 respondents from bank, business, university student and brokerage firm
and investors have been taken as sample.
).).1 Eno8$edge a#out IPO
The survey reveals that ma!ority of respondents knows about I(*. They are asked either
they have knowledge of I(* or notA The finding is presented below in the table and pie
chart.
).).1 ,ho8'ng re,/on,e fro" the /art'c'/ant,
S.N Re,/on,e Nu"#er, Percentage
4. =es, I know 410 71
;. %omewhat 61 ;1
6. 8onIt Jnow 40 41
Tota$ 1*1 111
1;
These figures show that most of the people "71 percent# of the respondents have
knowledge about I(* and ;1 percent of respondent have little bit knowledge. %imilarly,
41 percent of the respondents are completely unaware of I(*. A chunk of ?niversity
student and bank staffs were familiar with I(*. 2ut, minority of them responded with
negative answer. %imilarly Investors labeled their knowledge as OsomewhatI and OyesI.
).).! Source, of 'nfor"at'on a#out IPO,
*ut of 401 respondent most of the respondents >>K, gets information through media.6>K
through friends M relative and 47.66K M >.7K through brokers M others sources
respectively. .hich is shown in the below table and figure.
).).! ,ho8'ng ,ource, of 'nfor"at'on a#out IPO
S.N A$ternat'(e No of Re,/on,e @age
4 Through media 99 >>.11
; Through 2rokers ;9 47.66
6 /riends M Felatives 04 6>.11
> *thers 7 >.97
Tota$ 1*1 111
1)
20%
0%
!0%
8on't Jnow %omewhat <ave Jnowledge
These figures show that most of the investors ">>K# get information about I(* through
media. %imilarly 6>K gets through their friends M relatives. The percentage of investors
get information through different 2rokers are 47.66K and rest 0K get information
through other sources.
).).% In(e,t'ng through IPOF
401 respondents were asked whether they are investing on I(* or not. The result shows,
most of the respondents from different sector were investing in shares through I(*. The
detail is shown in the table and figure below.
).).% ,ho8'ng 'n(e,t'ng 'ntere,t on IPO
S.N A$ternat'(e
No of
Re,/on,e
@age
4 Fegularly 441 @>.66
; $ot at all 40 41.11
6
$ot yet, but
planning
;0 0.97
Tota$ 1*1 111
;*
The above figure shows the respondents interest on $epalese capital market through I(*.
*ut of 401 respondents @>.66K are investing regularly. 41K are not investing in I(* and
around 0K are planning for I(*.
).).) Ha#'t of read'ng Pro,/ectu, #efore 'n(e,t"ent.
.hile investing in shares issued by different companies everyone should have the habit of
reading prospectus of that particular company. The prospectus gives lots of information
about the company. To know the prospectus reading habit 401 responds were asked the
)uestion. The result is shown in the table M figure below.
).).) ,ho8'ng ha#'t of read'ng /ro,/ectu, #efore 'n(e,t"ent.
S.N A$ternat'(e
No of
Re,/on,e
@age
4 =es 449 77.66
; $o ;4 4>.11
6 $o Idea 46 @.97
Tota$ 1*1 111
;1
.hile going to public Companies issue their prospects, to show their image in the market.
This )uestion was related with this. The investor has asked do they read prospects before
the investment. The reply is )uite satisfactory. 77.66K investor read the prospects before
they invest their money.4>K investor does not consider the prospects, while investing and
@.97K investors have no idea.
).).* Se$ect'on of co"/an for 'n(e,t"ent.
The )uestion was asked to know why the investor chooses the particular company to
investment. This )uestion was asked with four alternatives. The result is shown in the
table M figure below.
).).* ,ho8'ng ,e$ect'on of co"/an for 'n(e,t"ent.
S.N A$ternat'(e
No of
Re,/on,e
@age
4 Corporate Image 0; 6>.97
; +anagement Team ;7 4@.11
6 (rofitability 99 >>.11
> *thers 0 6.66
Tota$ 1*1 111
;2

*ut of 401 respondents most of them ">>K# select the company for their profitability.
6>.97K choose their company for their corporate image. %imilarly 4@K choose for the
management team of the company and 6.66K select the company for other reasons.
.hich are shown in the above figure.
).).6 5ot'(at'ng factor for 'n(e,t 'n IPO
The )uestion was designed to know the motivating factor for investment. +ost of the
respondents said as their motivating factor for investment was high profitability
opportunity in short period of time.
).).6 ,ho8'ng the "ot'(at'ng factor for 'n(e,t 'n IPO.
S.N A$ternat'(e
No of
Re,/on,e @age
4 (erformance of company 4; @.11
; $o brokerage Commission ;0 49.97
6
<igh profitability opportunity in
short period 446 70.66
Tota$ 1*1 111
;3
.hile investing, the motivating factor plays a vital role. .hat factors really motivate the
investor to invest in sharesA *ut of 401 respondents most of them, around 70.66K invest
in I(* for high profitability in a very short period of time with a very low risk. 49.97K
invest in I(* as there is no brokerage commission and @K invest for the performance of
the company.
).).9 Preferred Sector for In(e,t"ent
401respondents from different sector were asked which sector they prefer to invest in, the
result is shown in the figure below.
).).9 ,ho8'ng /referred ,ector for 'n(e,t"ent.
S.N A$ternat'(e
No of
Re,/on,e @age
4 /inancial 4;4 @1.97
; $on- /inancial ;5 45.66
Tota$ 1*1 111
;4
+ost of the investors prefer to invest in the financial sectors rather than in non financial
sectors. Among 401, @1.97K said that they prefer financial sectors while 45.66K said
they prefer non financial sectors.
).).: Preferred 7'nanc'a$ Sector for In(e,t"ent
Among the 401 respondents 05 prefer commercial bank, ;7 prefer development bank, >>
prefer finance company and only ;1 prefer Insurance company for investment in financial
sector.
).).: ,ho8'ng the /referred f'nanc'a$ ,ector for 'n(e,t"ent.
S.N A$ternat'(e
No of
Re,/on,e @age
4 Commercial 2anks 05 65.66
; 8evelopment 2anks ;7 4@.11
6 /inance Company >> ;5.66
> Insurance Company ;1 46.6>
Tota$ 1*1 111
;5
+ost of the investors, 65.66K, said that they prefer to invest in Commercial 2anks. 4@K
people said they prefer to invest in 8evelopment 2anks. Investors preferring to invest in
finance companies and insurance companies are ;5.66K and 46.6>K respectively.
).).; Preferred Non-7'nanc'a$ Sector for In(e,t"ent.
Among the 401 respondents for the )uestion which non- financial would you prefer to
invest in, the responses are as followsB
).).; ,ho8'ng the /referred non- f'nanc'a$ ,ector for 'n(e,t"ent.
S.N A$ternat'(e No of Re,/on,e @age
4 <otel ;4 4>.11
; +anufacturing M processing >9 61.97
6 Trading 6; ;4.66
> *thers 04 6>.11
Tota$ 1*1 111
;6
Among non financial sectors, *thers sector which include hydropower sector too were in
investorIs preference. %urvey done among 401 investors 6>K said they prefer to invest in
others. 61.97K said they prefer to invest in manufacturing and processing companies.
;4.66K prefer to invest in trading and only 4>K preferred for hotel sector.
).).11 I, the /re,ent cond't'on of Ne/a$ ', ,u'ta#$e for 'n(e,t"entF
This )uestion was designed to know the investors response for investment in the current
situation. The result is shown in the figure below.
).).11 ,ho8'ng /re,ent cond't'on of Ne/a$ for 'n(e,t"ent.
S.N A$ternat'(e
No of
Re,/on,e
@age
4 =es 44> 79.11
; $o 69 ;>.11
Tota$ 1*1 111
;1
&conomic M (olitical factors have direct impact on capital market. As &conomic M
(olitical factors are not stable these days here in $epal so we asked 401 respondents that
the present situation is suitable for investment. *ut of 401 respondents 79K said yes and
;>K said this is not the suitable situation for investment.
).).11 Ut'$'-at'on of fund 8h'$e 'n(e,t'ng 'n IPO
The )uestion was asked to know whether the investor use personal fund or take bank loan
for investment. The result is shown in table below and in figure.
).).11 ,ho8'ng ut'$'-at'on of fund 8h'$e 'n(e,t 'n IPO.
S.N A$ternat'(e
No of
Re,/on,e @age
4 (ersonal /und 5@ 90.66
; 2ank loanCCredit 0; 6>.97
Tota$ 1*1 111
;;

90.66K, the ma!ority of respondents said that they use their own fund to invest in primary
market. 2ut 6>.97K people used 2ank loan for investment. It means 6>.97 think they can
earn more from investing in shares than the cost of loan or credit.
).).1! 8hat t/e of IPO 'n(e,tor are ouF
The )uestion are asked to know whether the investor investing in I(* for the long term
purpose or the short term purpose. The result is shown in the table M figure below.
).).1! ,ho8'ng t/e of IPO 'n(e,tor
S.N A$ternat'(e
No of
Re,/on,e @age
4 'ong Tem @0 09.97
; %hort Term 90 >6.66
Tota$ 1*1 111
;)
*ut of 401 respondents most of the respondents "09.97K# investing in I(* for long term
purpose, that is they want to hold the shares for long time to get more benefit. Fests
>6.66K invest in I(* for short term purpose.
).).1% Rea,on that "o,t of the f'r", do not $'ke to go to /u#$'c.
This )uestion was asked to know how the investors think about the reason for why the
companies performing very well in the market do not like to go to the public. 401
respondents from different sector were asked. The result is shown in the table and figure
below.
).).1% ,ho8'ng rea,on for not go'ng to /u#$'c.
S.N A$ternat'(e
No of
Re,/on,e
@age
4 *bligation to mass shareholders 04 6>.11
; To keep control 96 >;.11
6 Compleity in management 69 ;>.11
Tota$ 1*1 111
)*
+ost of the companies do not want to go to public. Among 401 respondents >;K thinks
control is the ma!or reason for not going to public. *ther 6>K think they do not want to
bear the obligation to mass shareholders. And rest ;>K thinks they don't want to go to
public due to the Compleity in management.
).).1) Nu"#er of co"/an'e, 'n(e,ted.
This )uestion was designed to know the fre)uency of investment by different investors in
the I(*. 401 respondents were asked. The result is shown in the table and figure below.
).).1) ,ho8'ng No. of co"/an'e, 'n(e,ted
S.N A$ternat'(e No of Re,/on,e @age
4 $one ;4 4>.11
; %ingle >; ;@.11
6 ;-> Companies 06 60.66
> +ore than four companies 6> ;;.97
Tota$ 1*1 111
)1
*ut of 401 respondents 60.66K said that they have invested in ;-> companies. ;@K said
%ingle Company, ;;.97 said that they have invested in more than four company and 4>K
were found to invest in none of the organization.
).).1* Pu#$'c th'nk'ng a#out Ne/a$e,e Ca/'ta$ 5arket.
This )uestion was asked to different respondents to know their view about the $epalese
Capital +arket. In the current situation most of the respondents thinks $epalese Capital
+arket is driven by rumor M whim. The result is shown in the table M figure below.
).).1* ,ho8'ng th'nk'ng of Ne/a$e,e Ca/'ta$ 5arket
S.N A$ternat'(e
No of
Re,/on,e @age
4 8riven by rumor M whim 5; 94.66
; *perating efficiently ;4 4>.11
6 $o Idea 67 ;>.97
Tota$ 1*1 111
)2
*ut of the 401 respondents most of the respondents 94.66K said our capital market is
driven by rumor M whim. ;>.97K said they have no idea and 4>K said it is operating
efficiently. .ith the response of different respondents in this )uestion we may say that
our capital market is driven by rumor M whim.
).* 5a&or 7'nd'ng, on Pr'"ar data
Along with secondary data, primary data was taken to !ustify the study on the topic. 2oth
interviews and )uestionnaires methods were implemented for this purpose. The ma!or
findings on primary data are as followsB
Interviews are taken from the officials of %ecurity 2oard of $epal, Citizen
Investment Trust, $C+' and )uestionnaires are distributed to the respondents
from different sectors to collect the primary data. +ost of them epressed
happiness over the growth of primary market but were not satisfied with the
current situation of secondary market.
+ost of the people are investing in primary market for long term purpose that
means they want to hold the shares. +ore than 09K people investing in primary
market for such purpose. Fest of the people investing in primary market !ust to get
the short term benefit.
)3
The primary source of data shows that the ma!or source of information of public
offering is media. (ublic getting information of I(* mostly from print media.
(eople are getting aware to primary market to choose the right sector for
investment. Investors are making portfolio of their investment, 60K investor
invests their money in two to four companies.
+ost of the investor "more than 70K# read prospects of the company before
investing their money in stocks.
(rofitability is the encouragement factor for investment. The investors think that
those companies who are performing well in the market will do better in the
future.
(eople think that the present environment is suitable for investment. @1.97K
people prefer to invest their money in the financial sector.
This study has found that public response to the primary market is highly positive
due to lack of opportunities for investment in other sector. 8espite this, public are
attracted towards shares to increase their value of investment.
(ace of public offering is also increasing as amount of in approved continuously
increase from 4556C5> ";>>.> million# to ;117C1@ "4199@.;1 million#.
)4
CHAPTER-0
SU55AR>C CONC+USION AND RECO55ENDATION
*.1 Su""ar
(rimary market is the market for new securities. The key mechanism of primary market is
initial public offering "I(*#. The first time issuance of securities to the public is known as
I(*. The securities market consists of new issue market and %tock &change. $ew
securities are offered to the investors for the first time through Initial (ublic *ffering.
(rimary market allows issuance of new securities in order to help the issuing companies
to raise funds for starting new enterprise or for epansion and diversification of the
eisting ones. The securities market development in $epal is in early stage of growth.
The basic ob!ective of this study is to assess public response to the initial public offering:
this study also focuses on the dealing process and pace of the initial public offerings.
The primary and secondary, both types of data are taken to analyze the ob!ective of the
study. (rimary data are taken from direct )uestionnaire provided to the general investors.
%econdary data are taken from the publication of %&2*$, $&(%& and various merchant
bankers.
The securities market plays a strong role in bringing into contact the firm and the
individuals. %o it can be said that the confidence of the public depends heavily on the
functioning and the implementation of regulations of %&2*$. %ecurities 2oard $epal is
the regulatory body of $epalese stock market. %tock &change 'imited is the trading
body. 2efore going to the public, the company must be approved from %&2*$. After
getting approval, issuing company must give its information to the $epal stock &change
'imited and Company FegisterIs *ffice.
Issuing company is free to choose one or more than one issue managerCs for the process
of issuing the shares. 2ankers to the issue also involve during this period. Issue manager
has to publish a public notice in the national daily newspapers to offer public for
investment. The notice must be published seven days before the application form
distribute date. The issue manager has to publish and distribute the prospects. (rospects
make easy to the public to decide whether to invest their money in the share or not. The
application period must not be more than one month. If issue managers think the re)uired
)5
applications have been collected, they can close, anytime after one week, to receive
application. If over application is received, the distribution of share should be decided
through allotment procedure. /or this purpose additional >1 to 51 days can be taken. After
allotment within net 40 days the issue manager has to refund the money of those public
whose application has not been accepted. .ithin 61 days of refund period the certificates
has to be distributed.
According to %ecurities 2oard, ;91 issue approval of different companies for public issue.
There are 401 companies listed in $epal %tock &change 'imited. In a year ;117C1@,
maimum, 9> companies have got approval from %&2*$. +inimum 0 companies have
got approved form %&2*$ in each of the year 4559C57, 455@C55. (ublic response to the
financial institutions and insurance sectors is higher than non financial sectors.
In financial intuitions and insurance sector, the subscription of commercial bank seems
4>.;9 times in average, and of development banks has took 45.14 times in average. This
shows the public response to development banks was greater or more than commercial
banks. (ast data shows that the average subscription of finance companies was 7.4> times
while average subscription of insurance company seems ;4.79 times. .hich shows the
most responded sector was insurance sector.
%imilarly, of non financial institutions the average subscription is ;.5@ times. It shows non
financial sector has also got cheering response from the public. 'ast few yearIs
eperience shows that there are limited non financial sectors available in the country that
satisfied the investors.
The primary source of data shows that the ma!or source of information of public offering
is media, >>K gets information through media. +a!ority investors are seemed to be new
in the market. 60.66K investor invests their money in two to four companies. These days,
people are getting aware to primary market to choose the right sector for investment.
They read prospects of the company before investing their money in stocks. +ore than
71K respondents read prospectus before investment. Corporate image M (rofitability is
the encouragement factor for investment. The investors think that those companies who
are performing well in the market will do better in the future. +ore than 90K investors
)6
invest money in the primary market by using their own fund. >;K investors think that the
companies do not like to go to public, the ma!or reason they think is Control.
79K (eople think that the present environment is suitable for investment in I(*. @1.97K
people prefer to invest their money in the financial institutions and insurance sector. 71K
people investing in I(* having good knowledge of it.
+ost of the respondents, about 94.66K are of the view that capital market is driven by
rumor M whim. Also most of the respondents who are investing in I(* for the long term
purpose that is if they get the shares they want to hold. Father few respondents hold
shares for long time that is they want short term benefit.
This study has found that public response to the primary market is highly positive because
people are getting aware of stock market, flow of money in the market is higher, people
have realized the importance of the investment in shares, people have seen that most
companies are distributing dividends, share prices of most companies are increasing and a
lack of better alternative for investment.
(ublic Fesponse in stock market is high due to lack of opportunities for investment in
other sector. 8espite this, public are attracted towards shares to increase their value of
investment.
*.! Conc$u,'on
+ost of the general investors in $epal do not have sufficient information regarding the
primary market but still they are interested to invest money in the primary market. This is
good sign to the epansion of the primary market.
As per this study, almost every sector is getting good response from general public.
%pecifically financial institutions and insurance sector is more preferable for general
public than non financial sector.
(ace of initial public offering in $epal seems to be irregular. The number of companies
approved for public offering by %&2*$ in a single year varies from 4@ to 0. The highest
amount of issue approved by the board was Fs.4000.44 million while the lowest amount
of issue was Fs.;0>.;4 million. If we see on the basis of sector, %&2*$ had granted 7>K
approval for financial institutions and insurance sectors and ;9K approval for non
)1
financial sectors. *ut of 49,77; million, the financial and insurance sectors paid up
capital hold 90K and that of non financial sectors hold 60K.
&ven though the organizationIs process of public offering is )uite long: the service
provided to the investors seems to be satisfactory. If raising interest of the public in to
primary market is one of the ob!ectives, then the primary market of $epal is fulfilling this
role gradually.
The structure of both segments of the market primaryC$ew and secondaryC%tock
echange has witnessed significant change. %ome of the important development in the
primary market which deserve specific mention are the establishment of merchant banks,
provision of speedy up allotmentCrefund, proportionate allotment of shares, allotment of
financial institution, increase in minimum application amount of investment in primary
issue such change have brought significant public response in new issue.
The secondary market which presented an institutional mechanism that may be
transparent, hardly regulate and rarely feared to investorIs protection but notyet in
practice. Among them are prescription of norms for intermediaries like broker in
tradingCsettlement and the bound of stock echange with participant from stock echange
members and investors. The echange has made tremendous effect in the volume of
transaction, share turnover, number of shareholders, public response and market
capitalization.
*.% Reco""endat'on,
To make the I(* more efficient, effective and convenient, following suggestions are
recommendedB
Investing in shares is a gamble which involves huge amount of risk. To be successful
in the stock market, investors should always be clear to his strengths, weakness,
re)uirements, wishes, risk taking capabilities and how to react on different and ever
changing market conditions. They should not buy the shares of a company until they
know details about it.
+ost of the public issues are from banking and finance sector so issue-manager
should take initiative step to promote their business from other sectors too. They
should be e)ually effortful in developing the public offering market as an avenue for
cost effecting financing.
);
In $epal, opportunity to invest in primary market is low. They have to wait a long
period to invest. If they hurry to invest in any of the company, they may have to suffer
from loss. %o, to get opportunity to invest in profitable stock they should have
patience on them.
Issuing companyIs post issue compliance practice is found to be poor. The issuer
companies should be made aware in complying with the post issue legal provisions at
the time of public issue. Issue manager should also take the responsibility to make the
issuer companies aware of compliance issue.
The concerned authorities should conduct various research studies and disseminate
the information relating to the share trading activities to increase the understanding of
the investors in using financial tools to estimate the intrinsic value of shares of a
company before making investment decision.
The government, concerned bodies and individuals have to work hard to make the
investment in securities preferable to investors by implementing the rules, regulations,
policies and activities more strictly. The regulatory authorities of the stock market
should try to rise the trading of shares by regulating the activities and performance
concerned bodies such as brokers and the listed companies fre)uently to create the
efficient pricing of shares.
The stock market lacks the eistence of sophisticated investors. %o, it is recommended
to the regulatory bodies to carry out programs using various media and spot program
to inform and attract the potential investors, both individual and institutional, in
investing into shares.
%tock market is heading towards the right directions so it is developing and growing.
It is utilizing the unused surplus resources in productive sectors. .ith the provision of
stockbrokers and market makers in 4556, the securities market has been broadened
and this has also developed specialization in providing services to securities market.
Festriction on foreign direct and portfolio investment should be reviewed with a view
toward the elimination of unnecessary impediments.
The Central 8epository %ystem "C8%# must be introduced to the current trade as soon
as possible. This means that very high volume or trading can be cleared and settled in
timely and cost-effective way, there by supporting the overall development of $&(%&.
))
(resently, intuitional players have not been able to play any noticeable role in the
stock echange. 'imited market, allotment procedure and emphasis of small investors
have not helped to enhance the role of the institutional players. Increased role of such
players will make the market more competitive.
.hile investing or trading in the primary or secondary market, the ma!or
consideration should be made that of the promoters, directors and managers in $epal.
*ther considerations may be market prospect, professionalization of management and
overall environment.
1**
BIB+IO=RAPH>
Book,
2hattarai, F. ";11>#. Investments Teor! an" #ract$ce% JathmanduB 2uddha Academic
(ublishers and 8istributors.
2righam, /. and 'ouis, C. "4550#. Interme"$ate &$nanc$al Mana'ement% $ew =orkB The
8ryden (ress.
2righam, /. "45@;#. &$nanc$al Mana'ement Teor! an" #ract$ce. $ew =orkB The 8ryden
(ress.
/isher, 8.&. and 3ordon, F.3. "455;#. Secur$t! Anal!s$s an" #ortfol$o Mana'ement% $ew
8elhiB (rentice <all of India "p# 'td.
Eupta, %. C. "4555#. &un"amental of Stat$st$cs. $ew 8elhiB <imalayan (ublishing <ouse.
Jothari, C. F. "455>#. (uant$tat$ve Tecn$)ues% $ew 8elhiB Dikas (ublishing <ouse (vt.
'td.
(andey, I.+. "455;#. &$nanc$al Mana'ement% $ew 8elhiB Dikas (ublishing <ouse (vt.
'td.
(radhan, F. %. "455>#. &$nanc$al Mana'ement #ract$ces $n Nepal. $ew 8elhiB Dikas
(ublishing <ouse (vt. 'td.
(radhan, %. "455;#. Bas$c of &$nanc$al Mana'ement% JathmanduB &ducational &nterprises
"(# 'td.
%harpe, .illiam /., Eordon 3, Aleander, and 3effery D. 2ailey ";111#. Investments,. $ew
8elhiB (rentice <all of India (rivate 'imited.
%hrestha, +. J. "45@1#. &$nanc$al Mana'ement Teor! an" #ract$ce. JathmanduB
Curriculum 8evelopment Centre
.olf, <. J. and (ant, (. F. ";110#. Soc$al Sc$ence an" Tes$s *r$t$n'. JathmanduB
2uddha Academic (ublishers and 8istributors.
1*1
THESIS
<abibullah, <. "4555# /inancial +arkets in least 8evelopment Countries. ?npublished
+asterIs Thesis, Central 8epartment of +anagement, Tribhuvan ?niversity.
(anday, 2. ";114# (ublic response to (rimary issue of %hares in $epal. ?npublished
+asterIs Thesis, Central 8epartment of +anagement, Tribhuvan ?niversity.
(audel, $. ";119# (ublic Fesponse to Initial (ublic *ffering in $epal. ?npublished
+asterIs thesis, %hanker 8ev Campus Tribhuvan ?niversity.
(audyal, +. ";11;# Investing in %hares of Commercial 2anks in $epal. ?npublished
+asterIs thesis, %hanker 8ev Campus Tribhuvan ?niversity.
%harma, %. ";11;# (roblems M (rospects of (rimary M %econdary +arket in $epal.
?npublished +asterIs thesis, %hanker 8ev Campus Tribhuvan ?niversity.
%hrestha, +. "4559# (ublic Fesponse to (rimary issue of %hares in $epal. ?npublished
+asterIs Thesis, Central 8epartment of +anagement, Tribhuvan ?niversity.
GOURNA+S AND PERIODICA+S
Annual Feport ";117C1@#. %ecurities 2oard of $epal pp 0-@0
8ahal, E.2. ";117 3uly#. 'The performance of $epalese I(*s'. SEBON +ournal. pp 61->@
(aul, +. "4591#.'The review of international capital markets'. Te Amer$can Econom$c
Rev$e,
S8.72$ 5nnual Ee%orts$ Larious Lolu&es$ (at"&an!u#
%hrestha, +.J. "455;#. '%hareholdersI democracy and annual general meeting feedback,
portfolios analysis'. Nepal #u-l$cat$ons%
Si&"a$ /#2# '1)6*,# >The capital market in India'. Himalayan Publishing
House.
1*2
DEBSITES 7OR RE7ERENCE
4. *fficial website of $I8C Capital +arkets, PhttpBCwww.ncml.com.npQ
;. *fficial website of $&(%&, PhttpBCwww.nepalstock.comQ
6. *fficial website of $+2, PhttpBC www.nmb.com.npQ
>. *fficial website of $F2, PhttpBCwww.nrb.org.npQ
0. *fficial website of %&2*, PhttpBC www.sebonp.comQ
9. PhttpBC www.wikipedia.comQ
7. Phttp:C www.nepalsharemarket.comQ
@. %earch engine, PhttpBCwww.google.comQ
1*3
Appendix-1
Questionnaire
This questionnaire is a part of my research work entitled Public
Response to IPO. I request you all to fll this questionnaire with
sincerity. our response will ha!e direct impact on research outcome"
so I request you to be honest.
Personal Information:
#ame$ %%%%%%%%%%%%. Occupation$ %%%%%%%..
&'e()e*$ ................. +ducation$ %%%%%%%%
&ddress(Phone #o.%%%%%%%%%%%%%%%%%%%%%%.
Objective Questions
,- .hat is IPO/ 0o you ha!e any idea/
a- 0on1t know 2 - b- )omewhat 2 -
3- es" I know properly 2 -
4. .hat are the sources of information about IPOs
a- Throu'h 5edia 2 - b- Throu'h brokers 2 -
c- 6riends and relati!es 2 - d- others 2 -
7. &re you in!estin' in stocks throu'h IPO/
a- Re'ularly 2 - b- #ot at all 2 - c- #ot yet" but plannin' 2
-
8. 9efore the In!estment decision do you read prospectus of o:erin'
company/
a- es 2 - b- #o 2 - c- #o idea 2 -
;. <ow do you select the company for in!estment/ 2Tick one or more" if
applicable-
a- 3orporate ima'e 2 - b- 5ana'ement team 2 -
c- Proftability 2 - d- other 2please specify-%%%%%%
=. .hat is the moti!atin' factor that you come to In!estment in Public
O:erin'/
a- Performance of 3ompany 2 -
b- #o brokera'e commission 2 -
c- <i'h proftability opportunity in short period 2 -
>. .hich sector would you prefer to in!est/
a- 6inancial 2 - b- #on 6inancial 2 -
?. .hich sector would you prefer to in!est in fnancial institution and
Insurance/
a- 3ommercial 9anks 2 - b- 0e!elopment 9anks 2 -
c- 6inance 3ompanies 2 - d- Insurance 3ompanies 2 -
1*4
@. .hich sector would you prefer to in!est in non fnancial institution/
a- <otel 2 -
b- 5anufacturin' A Processin' 2 -
c- Tradin' 2 -
d- Other companies" please specify........................ 2 -
,B. 0o you think #epal1s present condition is suitable for in!estment in
IPO/
a- es. 2 -
b- #o. 2 -
,,. .hich fund would you like to use while in!estin' in IPO.
a- Personal 6und 2 -
b- 9ank loan( 3redit 2 -
,4. .hat type of IPO in!estor are you/
a- Con' term 2 -
b- )hort term 2 -
,7. .hat do you think most of the frms do not like to 'o to public/
.hat may be the reason/
a- Obli'ation to mass shareholders 2 -
b- To keep control 2 -
c- 3omple*ity in mana'ement 2 -
,8. <ow many companies ha!e you in!ested in/
a- #one 2 -
b- )in'le 2 -
c- 4D8 3ompanies 2 -
d- 5ore than four 3ompanies 2 -
,;. .hat do you think about the #epalese 3apital market as an IPO
in!estor/
a- 0ri!en by rumor A whim. 2 -
b- Operatin' eEciently. 2 -
c- #o Idea. 2 -
Thank ou!
"uraj "hrestha
"hanker #ev $ampus
Phone %o& :- '()1*+)),*

1*5
A//end'4-!
Proce,,'ng of Pr'"ar Data
Huer De,cr'/t'on Nu"#er Percentage
4. Jnowledge of Initial
public offeringB
a. =es 11* 91
b. %omewhat %1 !1
c. 8onIt Jnow 1* 11
Tota$ 1!1 111
Huer De,cr'/t'on Nu"#er Percentage
;. %ource of information
about I(*.
a. Through +edia 66 ))
b. Through 2rokers !6 19.%%
c. /riends M Felatives *1 %)
d. *thers 9 ).69
Tota$ 1*1 111
Huer De,cr'/t'on No Percentage
6. Investment through I(*B
a. Fegularly 441 @>.66
b. $ot at all 40 41
c. $ot yet but planning ;0 0.97
Tota$ 1*1 111
Huer De,cr'/t'on No Percentage
>. <abit of reading
prospectus before
investmentB
a. =es 449 77.66
b. $o ;4 4>
c. $o idea 46 @.97
Tota$ 111
Huer De,cr'/t'on Nu"#er Percentage
0. %election of company
for investment.
a. Corporate image 0; 6>.97
b. +anagement team ;7 4@
c. (rofitability 99 >>
d. *thers 0 6.66
Tota$ 1*1 111
Huer De,cr'/t'on No Percentage
9.+otivating factor for invest
in I(*B
a. (erformance of Company 4; @
b. $o brokerage commission ;0 49.97
c. <igh profitability
opportunity in short period
446 70.66
Tota$ 1*1 111
1*6
Huer De,cr'/t'on No Percentage
7. (referred sector for
investmentB
a. /inancial 4;4 @1.97
b. $on-financial ;5 45.66
Tota$ 1!1 111
Huer De,cr'/t'on Nu"#er Percentage
@. (referred financial
sector for investment.
a. Commercial 2anks 05 66.66
b. 8evelopment 2anks ;7 4@
c. /inance Companies >> ;5.66
d. Insurance Companies ;1 46.6>
Tota$ 1*1 111
Huer De,cr'/t'on Nu"#er Percentage
5. (referred non-financial
sector for investment.
a. <otel ;4 4>
b. +anufacturing M
(rocessing
>9 61.97
c. Trading 6; ;4.66
d. *thers 04 6>
Tota$ 1*1 111
Huer De,cr'/t'on No Percentage
41.(resent condition of
$epal for investmentB
a. =es 44> 79
b. $o 69 ;>
Tota$ 1!1 111
Huer De,cr'/t'on No Percentage
44.?tilization of fund
while invest in I(*B
a. (ersonal /und 5@ 90.66
b. 2ank 'oanCCredit 0; 6>.97
Tota$ 1!1 111
Huer De,cr'/t'on No Percentage
4;.Type of I(* investorB a. 'ong Term @0 09.97
b. %hort Term 90 >6.66
Tota$ 1!1 111
Huer De,cr'/t'on No Percentage
46.Feason for not going to
publicB
a. *bligation to mass
shareholders
04 6>
b. To keep control 96 >;
c. Compleity in management 69 ;>
Tota$ 1*1 111
1*1
Huer De,cr'/t'on Nu"#er Percentage
4>. $o. of Companies
invested.
a. $one ;4 4>
b. %ingle >; ;@
c. ;-> Companies 06 60.66
d. +ore than four
Companies
6> ;;.97
Tota$ 1*1 111
Huer De,cr'/t'on No Percentage
40.Thinking about $epalese
capital marketB
a. 8riven by rumor M whim 5; 94.66
b. *perating efficiently ;4 4>
c. $o idea 67 ;>.97
Tota$ 1*1 111
1*;
A//end'4-%
Deta'$, of +',ted Co"/an'e,
CO55ERCIA+ BANE
S.
N.
Na"e of the
Co"/an
+',t'ng
Date Addre,, Te$. No. 7a4 No.
4 $abil 2ank
'td.
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&-mail B nabilRnabil.com.np
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(okhara-5,
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&mailB machbankR.mbl.com.np
194-061511
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061011
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2iratnagar
&mailB nicbRbrt wlink.com.np
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121