Central Depositary System

7/23/2019 Central Depositary System

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CAPITAL / STOCK MARKET OF NEPAL

Introduction of Stock

Normally, the stock of any organization constitutes the equity stake of its owners. It

represents the residual assets of the company that would be due to stockholders after discharge of

all senior claims such as secured and unsecured debt. Stockholder’s equity can not be withdrawn

from the company in a way that is intended to be unfavorable to the company’s creditors.

Stock Exchange

stock e!change is a form of e!change which provides services for stock brokers and

traders to by or sells stocks, bonds on other securities. Stock "!change also provides facilities for

issue and redemption of securities and other financial instruments, and capital events including

the payment of income and dividends.

History of Stock Market in the world

• msterdam Stock "!change in #$%& in the city of msterdam, Netherlands. 'aris

(ourse in #)&* in 'aris, +rance.

• 'hiladelphia Stock "!change in #)% in 'hiladelphia, -S.

• ondon Stock "!change in #/%# in ondon, "ngland.

o 0owever, a market had e!isted previously 1with records beginning in #$/2 agro3

commodity4 at 5onathan’s 6offee 0ouse, also in ondon.

• 7ilan Stock "!change in #/%/ in 7ilan, Italy.

• New 8ork Stock "!change in #/#) in New 8ork, -S. 9his e!change was preceded by

the (uttonwood greement of #)&.

• +rankfurt Stock "!change in #/&% in +rankfurt, :ermany. #/&% denotes the first records

of shares being traded. 9here was, however, a market for bonds 1debt instruments4 since

the late #/th century.




• (olsa de 7adrid in #/;# in 7adrid, Spain.

• 9oronto Stock "!change in #/$# in 9oronto, 6anada.

• ustralian Stock "!change in #/)& in Sydney, ustralia.

History of Stock Market in the Nepal

• Stock market began with the issue of shares by (iratnagar 5ute 7ills td in #;).

• Security 7arketing 6entre 1S764 was established in pril #)) under Industrial 'olicy,

#)* with the ob<ective of facilitating the transaction of government development bonds

and corporate securities.

• S76 started secondary trading of securities in November #/# which restricted to

government bonds.

• Security "!change ct, #/; was enacted in #/;.

• 9he then S76 was converted into Securities "!change 6entre 1S"64 in #/*. S"6

opened its floor for corporate share trading in November #/*.

• 9he first amendment in Securities "!change ct, #/; in #; paved the way for the

restructuring of stock market in Nepal, which led to establish Securities (oard of Nepal

1S"(=N4 in #; with a mandate to regulate and develop the stock market.

• 9he first amendment in the ct also led to convert the then S"6 into N"'S", a full3

fledged open3out3cry trading system with the induction of stock brokers in 5anuary #;,

#*.

Central Depositary System




In the conte!t of global, central depositary system is not new to stock market. (ut in the

case of Nepal, it is regarded as the innovation in the stock market. 9he 6>S provides its services

within an online computer system with 'articipants having direct online access to the system.

9rades are settled within a rolling 9?; settlement cycle on a strict >elivery versus 'ayment

1>v'4 basis. +inal and irrevocable transfer of funds occurs through the central bank with same3

day funds on settlement date. 9he 6>S has established a :uarantee +und to guarantee the

settlement of transactions in the event of a default by a 'articipant. 9he +und is managed by a

(usiness 6onduct 6ommittee that monitors operations relating to risk management.

Central Depositary System in Nepal

Several activities have already taken place in order to substitute the present paper versus

payment settlement system by an independent electronic computerized central depositary system.

9he formation of a three member committee by the government under the chairmanship of the

Securities (oard of Nepal is regarded as key in the process of adapting the 6>S.

9he story of 6entral >epositary System and clearing turned true after the formal

inauguration of the 6entral depositary on ;#, 7arch, &%## by 8uvra< @hatiwada. t the same

time the software was handed over by mbassador Aakesh Shud from "mbassy of India which

was prepared by 9ata 6onsultancy. =peration of 6>S system will open the new era in capital

market of Nepal as it will wipe out inconsistency and manipulation in stock trading as every

transaction and e!ecuter can be easily traced out. 9he safety, security of physical holding to

electronic medium will eliminate thefts, interceptions and subsequent.




9he capital market regulator has e!pressed hope that the operation of central depository

company will change the face of the secondary market. Since the operation of 6entral

>epository System 16>S4 will displace manual share transfer with automated system allowing

the hassle free participation of investors outside the valley in trading due to easier settlement,

moreover 6>S is supposed to promote securities market in the cities outside the capital where

despite the presence of brokerage services the difficulty of share transfer and settlement has

discouraged the transaction.

s per the website of the Security (oard of Nepal, "arlier, the board had refused to

approve the 6>S6 bylaw and directed it to revise the fee structure as the transaction would have

been e!pensive affair for the investors. 9he current fee structure is determined at minimum

threshold so that company will be at break3even point.

9he regulator has not yet given membership to the depository participants that are an

integral part of central depository’s settlement process. 9he depository participants will hold the

investor’s records in a dematerialized form. 9hey will act like bank for the securities while

6>S6 is going to be the clearing house that will settle the account after each share transactions.

ccording to the 6>S Aegulation3&%$/ any a bank or financial institution, stock broker,

registrar and transfer agent, custodian or such other entity as may be prescribed by the board

from time to time. 9he depository participants need to have As # million net worth to get license.

7erchant bankers seem to be better suited as depository participants due to net worth and

infrastructure which brokers lack but the ad<ustments might be made in order to include the stock

brokers as depository participants.

9he operation of 6>S6 will contribute in higher number of transaction as




dematerialization of physical scrip will make multiple transactions possible in a single day. 9he

6>S6 will deposit the bonus shares and shares bought in public offerings automatically in the

investors account at depository participants. 9he listed companies need to apply to get their

shares dematerialized to 6>S6 within the si! months of its operation.

B'"S9C nalysis 1political, "conomical, Social and 9echnology4

9he B'estC analysis of Nepal capital market evaluates the e!ternal macro3environment of

this market from the point of view of the 'olitical, "conomical, Social and 9echnological factors

who can give us the possibility to understand market grow or decline, potential and direction for

operations. 9hese affect all firms belonging to the analyzed market, factors which usually are

beyond the firm’s control and sometimes present themselves as threats, but however, changes in

the e!ternal environment also create new opportunities. 9he Dpest’ analysis takes into the

following factors2

3 'olitical2 6urrent legislation of the market, regulatory bodies and processes,

government policies, trading policies.

3 "conomical2 Nepalese economy situation, economy trends, general ta!ation issues,

ta!ation specific to productEservice, market and trade cycles.

3 Social +actors2 Number of inhabitants, consumer attitudes and opinions, media

views, law changes affecting social factors, buying access and trends, advertising and

publicity.

3 9echnological +actors 2 Information and communication, mechanismsEtechnology,

innovation potential, global communication.




SF=9 analysis 1Strength, Feaknesses, =pportunities and 9hreats4

3 Strength2

• 0igh number of e!ecutives which make the work of customers very convenient.

• Share market funds provide Bsame dayC liquidity, allowing investors to redeem

their shares.

• Share market funds offer investor market3based yields

• Share market funds provide a low3cost cash management vehicle for retail and

institutional investors. In part, stock market funds achieve low cost through

economies of scale3pooling the investments of hundreds to thousands of retail

investors, sometimes with the large balances of institutional investors.

3 Feakness2• No guarantee of, and investors are e!plicitly warned that money market

funds seek to offer investors return of principal may not always be

possible.

• ess awareness among general masses about the different services

provided by agencies.

• Inflation and >eflation rate is high.

•

Nepal too much depends on loan.• Nepal is facing financial pain despite healthy banks.

3 =pportunities2

• =pportunity to remind funds that purchase of illiquid securities.

• 9his could be the board the opportunity to question the most

knowledgeable people directly and to confirm that the adviser is

dedicating sufficient resources to credit analysis.

• Fe probably would change the way we manage our short3term portfolio if

NG was allowed to fluctuate, but I guess it would depend on the degree

of fluctuation.

• 9he recent market events, although painful afford the money market fund

industry the opportunity to assess the regulations that govern its




operations, and the more stringent practices adopted by some money

market funds that go beyond those regulations.3 9hreats23

• Aeorganization of agencies of stock market structure. 9he all agency have

started to redefine their ob<ective to attract customer’s attentions.

• few stock markets have been permitted to increase their number of

branches and its entry has talked directly solve out the problem of

investors.

9he conclusion of the B'"S9C analysis of the Nepalese 6apital 7arket from the point of

view of the political, "conomical, Social and 9echnological +actors are spitted in the four

categories of a SF=9 analysis2 Strength, Feaknesses, =pportunities, and threats. 9he scope of

using both of analysis is to analyze from all the aspects the Nepalese 6apital 7arket and to

identify which are the strength, weaknesses, opportunities, threats on this market.

+ive model of stock market2

9he model of pure competition implies that risk3ad<usted rates of return should be constant

across firm and industries. Fhile some people see equity investing as a technical e!ercise that

involves analyzing price charts and others see it as a purely quantitative process that involves

estimating the value of the company based upon its share price near3term earnings potential

compare to competitors.

3 9hreats of entry2 also known as barriers to entry, this concept involves the analysis

of how easy it is for new investor to enter the industry and consequently compete3away




the profit currently earned by e!isting investor within the industry. 'orters list the

following barriers to entry

• "conomies of scale

• 'roduct differentiation

• 6apital requirement• 6ost advantage independent of size

• ccess to distribution channels.

3 'ower of Suppliers2 where suppliers can e!ert power over a particular business or

industry due to their possession of a stronger competitive position, it is almost certain that

such a group of suppliers will raise prices and or restrict output in order to improve their

own rerun on capital at e!pense of the buyers. Normally, investor himself as regarded as

the supplier in the selling process.3 'ower of (uyers2 similar to those that face powerful suppliers, companies that strong

buyers3 or buyer group3 can fund that they or forced to offer favorable prices or credit

terms in order to retain customers. In the stock market, investor himself is considering as

the buyer.3 9hreat of Substitutes2 porter notes that where a product or service is unique, companies

are able to charge much higher prices than if the face completion from alternatives.

>egree of Aivalry2

9his includes2

• "!it barriers

• Industry concentrations

• +i!ed costs

• 6orporate stakes

(enchmarking of 6apital 7arket2




Fhen evaluating the performance of an investment, it’s important to compare it against

an appropriate benchmark. In the financial field, there are dozens of inde!es that analysts use to

estimate the performance of any investment.

7ost investors use Net 7ultiple and Net IAA as performance measures. 9he combination

of 7ultiple and IAA helps control for the assumed performance persistence and timing

dependency of IAA. Aecently, net >'I has emerged as an additional indicator of performance.

Investor like that >'I quantifies actual returns rather than anticipated return as indicated by

7ultiple and IAA.

Fith fund performance numbers in hand, benchmarking is the default answer for finding

future winners in the market. Investors use peer benchmarking in an asset class to understand

relative performance. +or this work, benchmarking datasets need to cover a representative set of

funds for a given time period, market focus and geographic e!posure.

s we know that, while peer benchmarks are relative, investor portfolio returns are

absolute. Fe rarely talk about this insight in the private equity and venture capital industry. 9o be

clear, a first quartile private equity funds can be the worst performer in multi3asset portfolio or

vice versa. 9his has led investors to look to public market equivalence benchmarking as way to

quantify public returns relative private fund returns.

Central Depositary System

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