Chapter-I

Introduction

1.1 Background of the study:

Capital Markets are the markets consisting long-term securities issued by the government
or a corporation. Capital Market typically relates with financial assets which have life
spans of greater than one year. Capital Market is a means through which scattered saving
and investable resources are converted into actual investment. Capital market is one of the
several factors that play a Prominent role in the economic development of the nation
(Levine and Zervos, 1998: 1-3).The saving institutions such as banks, investment trusts or
companies, specialized financial corporations and stock exchanges are some of the
important constituents of capital market (Bolton and Thadden, 1998;5).The primary role
of capital market is to allocate the economy’s capital stock among various productive
sectors (Fisher and Jorden, 2000:23). Capital invested in such sectors acts as seed money
and generates more funds for further investments. No modern corporation of any size can
function effectively with out ready access to capital markets at the lowest possible cost
(Bernstein, 1987: 54).
Nepalese Stock Market is very small as compared to other neighbor countries. Capital
plays a vital role in the economic development of a country. Being a capital deficient
country, Nepal has to make every endeavor to mobilize available capital effectively.
Securities are financial assets. Securities markets are mechanism created to facilitate the
exchange of financial assets. Therefore, the market exists in order to bring together the
buyers and sellers of Securities. Capital market is the mechanism designed to facilitate the
exchange of financial assets by bringing orders from buyers and sellers of securities
together. Stock market has been global phenomenon in the present world regardless of the
size of any particular region.
1.2 Profile of the Organization:
Nepalese capital market was given proper structure in June 1993 with the establishment,
SEBON as the market regulator. Since its establishment, SEBON has been concentrating
its efforts on improving the legal and statutory frameworks which are the bases for the
healthy development of capital market. SEBON is the supreme body to regulate the
Nepalese securities market. As a part of its continuous efforts to build a sound system, the
securities Exchange 15 Act, and 1983 was amended for the second time on Jan 30, 1997.
This amendment paved the way for establishing SEBON as an apex regulatory body as it

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 widened the horizon of SEBON by bringing Market intermediaries directly under its
jurisdiction and also made it mandatory for the corporate bodies to report annually as well
as semi annually regarding their performance. The main objective of SEBON is to
promote and protect the interest of investors by regulating the securities market, to
monitor and control the entire capital market, sale and distribution of securities and
purchase, sale or exchange of securities. SEBON was established with the objective to
render contribution to the development of capital markets by making securities
transactions fair, healthy, efficient and responsible. Whereas, its main functions are to
provide licenses to stock exchange and securities business person and to monitor the
activities carried by NEPSE to know if they are in accordance with the laws or not.
Despite this, Nepalese stock market is still underdeveloped and there is lot of
shortcomings in Nepalese stock market. Hence, the present study is conducted on
Nepalese stock market in order to find out its potential of growth, major problems and
prospects by using secondary as well as primary data.
1.3 Objective of the study:
The general objective of the study is:
 To examine the growth of Nepalese stock market.
 To identify the existing problems and challenges faced by the Nepalese stock market.
 To analyze prospects of Nepalese stock market.
1.4 Rationale of the Study:
Stock market recognizes the situation of economy. When stock market is booming the
economy is good and when stock market is declining the economy is bad. Stock markets
have direct relation with the economic growth. Economic growths come with more
earning capacity, opportunities to save and also the opportunity to invest. It must be noted
that economic growth is, too a great extent, dependent on the industrialization in a
country.
It represents the study to find out the problem, prospects and growth in the near future.
What policies can be formulated, what regulatory acts are needed and necessity of
amendments regarding the rules and regulation to develop it and make the market perfect
functioning. The standard is one of the elements to stock market development. Financial
statement should maintain accordingly which fulfill the requirement of related parties
needed information.

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 1.5 Review of Literature:
In this chapter, an attempt is made to review some of the literatures concerning the stock
market in Nepal. The chapter deals with the review of relating to the topic “A Study on
Nepalese Stock Market in the light of its Growth, Problem and Prospects” in detail.
Various books, journals articles and some previous research work related to this topic and
many indirect topics are reviewed in the context of Nepalese stock market as well as
international stock market.
1.5.1 Conceptual Review:
Financial Market
Financial market denotes the place or mechanisms where financial instruments are traded.
Financial instruments denote also paper evidence, showing the exchange of instruments
between concerned parties. A financial market is a place where firms and individuals
enter into contracts to sell or buy specific products, such as stocks, bond on future
contracts. This market provides a meeting place for buyers and sellers where price is
determined.
Securities Market
The securities market is the place where large number of financial securities (shares,
bonds, debentures etc) is traded according to the prescribed rules (Investors Guide,
1978:11). So far as the securities market is concerned, it is important constituent of
capital market; it has wide term embracing the buyers and sellers of securities and all the
agencies and institutions that assist the all sales and resale of corporate securities (Rugh,
1965: 50).
Stock Market
Stock market is known as secondary market in the other side of market segment under
capital market. It includes all transferable securities issued previously by corporate
bodies; such securities are also traded in the stock exchange. Stock market does not
include securities of private company as they are not capable of being dealt in on stock
exchange and are not marketable securities due to the restrictions on transferability. In
order to take the benefit from stock market the corporate bodies should have listed the
security in the stock exchange.
1.5.2 Review of Previous work:
Bhattarai (1990) has carried out on “Share Market in Nepal”. In which, he emphasized
the historical background and the analysis of various financial variables affecting the
smooth operation of share market. This study was mainly based on secondary data

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 obtained from various sources. He has applied both financial and statistical tools in the
study. He found that out of 12 sample companies 2 companies were useful to cross over
the average price-earning ratio, as a result, market price of shares were highly skewed.
Moreover, there was mismatch between calculated and quoted price. However, he
concluded 46 that the involvement of more and more institutions as well as individual
investors in capital market through broker’s network raised the transaction volume.
Rumors spread by brokers and create genuine speculation. Fair plays of bulls and bears
make market equilibrium resulting price stabilization speculation on the trading of shares
is encouraged. Thus, the market starts to walk randomly reflecting true value of shares.
Investors are facilitated by providing alternatives to make diversified portfolio.
Bhatta (1996) in his project paper “Assessment of the performance of listed companies in
Nepal” concludes that a highly significant positive correlation ship has been addresses
between risk and return chapter of the company. Investors expect higher return form that
stock, which associates higher risk. Nepalese capital market is not efficient one. So the
stock price does not contain all the information relating to market and company itself.
Neither investors analyze the overall relevant information of the stocks nor does the
member of stock exchange try to disseminate the information. So the market return and
risk both may not show high priced stocks. In the addition, Bhatta further addressed that
Investors of Nepal have not yet practiced to invest in portfolio of securities. An analysis
of the two securities portfolio shows that the risk can be totally minimizes if the
correlation is perfectly negative. In this situation, the risk can totally be diversified, but
when there is perfectly positive correlation ship between the returns of the two securities
the risk is not diversified.
To some extend he focused in the analysis of risk and return in common stock investment.
But due to many other aspects to analysis investor cannot easily assess the results. Indeed,
study did not focus the viewpoint of investors rather it concentrates the companies and
stock market. However, this study also explores some dimension for further research in
his topic.
1.6 Methods of study:
Research means to search or study about a phenomenon. Generally research is an effort to
search new fact, knowledge and principle in scientific ways. Therefore this chapter
highlights the research methodology used for the study of “A Study on Nepalese Stock
Market in the Light of its Growth, Problem and Prospects”. In this regard, this chapter
explains not only talk of the research methods but also consider the logic behind the

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 methods, which are used in the context of our research. This chapter consists of the
research design, population, sampling procedure and sources and analysis of data.

1.6.1 Research Design:

Research design is the conceptual structure within which research is conducted. In other
words, a plan of study or blue- prints for study is called research design or research
strategy. It facilitates the smooth sailing of the various research operations, thereby
making research as efficient as possible. Research design is a plan, structure and strategy
to obtain the objectives of the study.
This research is based on secondary data and primary data analysis. Hence, the historical
and descriptive research design has been used to conduct the study on focus of growth,
problems and prospects of Nepalese stock market It deals with the stock market on the
basis of available information.
1.6.2 Population and Sample:
The analysis of stock market, its growth, problems and prospects depends on the number
of company listed in the Nepal Stock Exchange and major economic indicator (GDP,
Inflation, Turnover etc) are taken as total population. Moreover, the companies that are in
existence and doing share transactions in NEPSE and the factor that affects the present
economic growth are considered as the convenient sample of the study.
1.6.3 Data Collection Procedures:
The required data have been collected from the various sources; but mainly from the
annual reports of securities exchange board, Nepal covering a period of 2018/019 to
2022/023. The main place of data was the central office of Nepal Stock Exchange
(NEPSE), Securities Boards office, Kathmandu and Economic Survey published by
Ministry of Finance. The main source of data is annual report of the SEBON. Besides
annual report, various bulletins available and useful to the study are also taken into
consideration. The research is mainly based on the secondary data.
1.6.4 Tools of Data Analysis:
To draw the conclusion by analyzing the collected data simple statistical tool are used as
follows:
Arithmetic Mean
An arithmetic mean is the value, which represents the group of values and gives an idea
about the concentration of values in the central part of the distribution. An average gives

5
 us a point, which is most representative of the data. It depicts the characteristic of the
whole group. The value of arithmetic mean lies in between the two extreme observations
of the entire data. It is an envoy of the mass of homogeneous data. An arithmetic mean of
a set of observations is defined as the ratio of the sum of all the observations to the total
number of observation.
The Value of the AM is obtained by adding together all the items and by dividing this
total by the number of items.
Diagrams and Graphs
Diagrams and graphs are visual aids which give a bird’s 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 sets of data.
1.7 Limitation of the study:
It is not a comprehensive study. There are some limitations of the study. Lack of
experiences, time, limited budget, up to date information are the main limitation of the
study. Apart from this some more limitation are presented below:
 The subject of the study is only “Growth, Problems and Prospects of Nepalese Stock
Market”.
 Up to 5 years period data are collected for the analysis purpose.
 The study covers only the past and present state of stock market in Nepal, hence does
not make any prediction about the future.

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 Chapter-II
Result and Analysis

In this chapter, the relevant and available data and information from Nepal stock
exchange (NEPSE), Security Board of Nepal (SEBON) and different articles are
presented, analyzed and interpreted to find out the growth, problems and prospects of
stock market in Nepal. Data presentation and interpretation is the important part of a
research work which analyze the data and information using various tools and techniques
to get the best results.
2.1 Presentation and Analysis of Secondary Data
This section deals with the presentation and analysis of the collected secondary data. This
part of the chapter reveals the growth of Nepalese stock market in terms of amount of
issue approval, number of issue approval, and number of listed companies, paid –up
value, annual turnover, market capitalization and NEPSE Index etc with different years.
2.1.1 Analysis of Amount of Issue Approval and Number of Issue Approval
The issuing company should register the securities in SEBON and get issue approval
before going to the public. During the process, SEBON reviews the prospects and other
relevant documents submitted by the existing rules and regulations. In the process,
SEBON has also been taking the comments of the experts as and when it deems
necessary.

Table 2.1
Amount of Issue Approval and Number of Issue Approval (From fiscal Year
2018/19 to 2022/23)

Fiscal Year Amount of Percentage No of issue Percentage of

Issue approval of Growth Approval Growth
(Rs in million
)
2018/19 1626.8 58.33 14 0
2019/20 2443.3 50.19 29 107
2020/21 2295.50 -6.05 34 14.70
2021/22 10668.20 364.74 64 88.23
2022/23 16828.51 57.74 64 0
Source: Annual Report, SEBON, 2022/2023

Figure 2.1

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 Trends of Amount of Issue Approval

Chart Title
18000
16000
14000
Amount of Issue approval
12000
Percentage of Growth
10000 No of issue Approval
Axis Title 8000 Percentage of Growth
6000
4000
2000
0
-2000

Table 2.1 shows the amount of issue approval, number of issue approval and their
percentage of growth from fiscal year 2018/19 to 2022/23. At the beginning fiscal year
2018/19, amount of issue approval, number of issue approval was 244.4 million and 16
respectively. From Table 4\2.1, the trend of growth of amount of issue approval and
number of issue approval seems fluctuating .The lowest and highest amount of issue
approval were 174 million and 16828.51 million in the fiscal year 2018/19 to 2022/23
respectively.

2.1.2 Analysis of Number of Listed Companies

Number of listed companies is an indicator of size of stock market. The size of stock
market increases with the increase in number of listed companies and vice versa.
Generally large stock market size indicates a developed stock market. Since listed
companies, in Nepalese context are only allowed to issue financial securities and transact
their shares in NEPSE. Listing of company is compulsory to make securities trading
eligible according to the section 8 of securities exchange Act,1983.

8
 Table 2.2
Number of Listed Companies (From fiscal Year 2018/19 to 2022/23)

Fiscal Year Number of Listed Companies Percentage of Growth

2018/19 125 9.65
2019/20 135 8
2020/21 135 0
2021/22 150 11.11
2022/23 159 6

Source: Annual Report, SEBON, 2022/2320

Figure 2.2
Increase or Decrease in Number of Listed Companies

180

160

140

120

100
Series1
80 Series2
60

40

20

0
2018/19 2019/20 2020/21 2021/22 2022/23

Table 2.2 shows the number of listed companies and percentage of growth of number of
listed companies from fiscal year 2018/19 to 2022/23. The number of listed companies
was 66 in the base year. There was increasing trend of listed companies from 66 to 115
from fiscal year 2018/19 to 2022/23.

2.1.3 Analysis of Paid –up Value

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 The situation of paid –up value in Nepalese stock market in various years is presented
below:
Table 2.3
Paid –up Value
(From Fiscal year 2018/19 to 2022/23)

Fiscal Year Paid – up Value (Rs in million) Percentage of Growth

2018/19 16771.9 25.12
2019/20 20008.6 19.30
2020/21 21798.8 8.95
2021/22 29465 35.17
2022/23 61140.0 107.50
Source: Annual Report, SEBON, 2022/23

Table 2.3 and figure 2.3 shows the paid up value and percentage of growth of paid up
value from fiscal year 2018/19 to 2022/23. There is increasing trend of paid up value over
the period. The paid up value was decreasing from Rs 4476.5 million to Rs 4459.8
million.

Figure 2.3
Increase or Decrease in Paid-up Value

70000

60000

50000

40000
Paid – up Value (Rs in mil-
30000 lion)
Percentage of Growth
20000

10000

0
9 0 1 2 3
8 /1 9 /2 0 /2 1 /2 2 /2
2 01 2 01 2 02 2 02 2 02

2.1.4 Analysis of Annual Turnover

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 Table 2.4

Annual Turnover

(From Fiscal year 2018/19 to 2022/23)

Fiscal Year Annual Turnover (Rs in million) Percentage of Growth

2018/19 4507.7 110.22
2019/20 3451.40 -23.43
2020/21 8360.1 142.22
2021/22 22820.8 172.98
2022/23 21681.14 -4.99
Source: Annual Report, SEBON, 2022/23

Figure 2.4
Annual Turnover in NEPSE

25000

20000

15000

Annual Turnover (Rs in

10000 million)
Percentage of Growth

5000

0
2018/19 2019/20 2020/21 2021/22 2022/23

-5000

Table 2.4 and Figure 2.5 show the annual turnover in value and percentage of annual
turnover from fiscal year 2018/19 to 2022/23. The highest turnover was Rs 22820.8
million in whereas the lowest turnover was Rs 202.6 million in the fiscal year.

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2.1.5 Analysis of Market Capitalization in NEPSE
Table 2.5

Market Capitalization

(From Fiscal year 2018/19 to 2022/23)

Fiscal Year Market Capitalization Percentage of Growth

(Rs in million)
2018/19 61365.9 48.14
2019/20 96813.7 57.76
2020/21 186301.3 92.43
2021/22 366247.5 96.59
2022/23 512939.07 40.05
Source: Annual Report, SEBON, 2022/23

Table 2.5 and Figure 2.5 show the market capitalization of listed securities from fiscal
year 2018/19 to 2022/23. The highest market capitalization was Rs 512939.07 million in
fiscal year 2020/21 whereas lowest was Rs 12295 million in 1995/96. The market
capitalization was decreased from Rs 13872 million to Rs 12295 million from fiscal year
2018/19 to 2022/23.

Figure 2.5
Market Capitalization in NEPSE

600000

500000

400000

300000 Market Capitalization

Percentage of Growth
200000

100000

0
2018/ 2019/ 2020/ 2021/ 2022/
19 20 21 22 23

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 From the above Figure, the highest growth rate of market capitalization was 96
percent in the fiscal year 2007/08 and lowest was in 2019/20 i.e. -25.13 percent. It
seems that there was all positive.
2.2. Major Findings of the Study
The major findings of the study from the analysis of primary and secondary data are as
follows.
1. From the analysis of growth of Nepalese stock market, it can be concluded that
growth of market capitalization and growth in number of market capitalization and
growth in number of institutional investor are satisfactory. However, majority of the
respondents are not satisfied with the growth in number of listed companies. On the other
hand, respondents are not certain whether growth amount of IPO and growth in volume of
security traded is satisfactory or not.

2. The investors are facing several problems and difficulties during their transaction
period .The majority of the respondents are agreed with the asked statements. So it was
concluded that main problem of stock market are insufficiency of legal rules and
regulations, unavailability of information, influenced by small number of large investors ,
in sufficiency of number of issue managers, rumor based market, insufficient knowledge
of investors etc. However, the respondents are not realized the need of new stock
exchange.
3. By analyzing the prospects of Nepalese stock market, it can be concluded that
increase in number of listed companies and turnover of listed companies, return from the
stock market, increase in amount of IPO and increase in trend of larger companies listed
are main factor for the prospects of Nepalese Stock Market.
4. However, the majority of respondents cannot say general provisions are becoming
easy or not, program launched by SEBON is successful or not etc. Most investors are not
satisfied with the policy of dynamic, transparent credible and investor friendly stock
market taken by government.
5. The amount of issue approval in base year was 244.4 million which is increased to
16828.51 million in fiscal year 2022/23.
6. The number of issue approval was increased from 16 to 64 from fiscal year 2018/19
to 2022/23. The growth rate of number of issue approval was fluctuating over the periods.
So it can be concluded that growth of number of issue approval is not satisfactory.

7. The total number of listed companies reached from 66 to 159 in fiscal year2022/23.

13
The growth rate of listed companies is all positive.
8. The paid-up value of listed securities is highest in 2022/23 with Rs 61140 million.
The growth rate of paid-up value is all positive except in fiscal year 2019/20.

9. The highest market capitalization ratio of 53.43 percent in fiscal year 2022/23 is better
ratio than other fiscal years. Thus, it can be concluded that the growth of stock market is
growing relative to its past experience.

10. By analyzing the overall aspect of stock market, it is found that the stock market is
suffering from various problems. The growth of Nepalese stock market is satisfactory and
the prospect of stock market is equally strong if the government has taken the
transparent credible and investor friendly policy.

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 Chapter-III
Summary and Conclusions

In the previous chapters, researchers explained the introduction, review of literature

research methodology and presentation and analysis of data. This chapter presents the
summary, conclusions and recommendations from the analysis of primary and secondary
data regarding the growth, problems and prospects of Nepalese stock market.

3.1 Summary
Stock market in recent years has become an integral part of economic development. It can
play a vital role in encouraging and channeling the saving to provide the entrepreneurs for
investment in profitable projects in the economy. Examples from the developed countries
have proved that the stock market is the cause and economic development is the effect.
Stock market serves as a direct link between the suppliers and the users of capital fund.
Thus, stock market has both theoretical and practical perspectives. This study mainly
aims to examine the situation of stock market in Nepal. The specific objectives of the
study are to examine the growth of Nepalese stock market, to identify the problems and
challenges of stock market and to analyze the prospects of stock market in Nepal.

Both historical and descriptive research design are carry out this study. The growth of
Nepalese stock market is examined on the basis of amount of issue

approval, number of issue approval, number of listed companies, annual turnover, market
capitalization and paid –up value. Primary data are analyzed on the basis of Likert scale
using various measurement-base statements.

During the fiscal year 1993/94, the annual turnover is in fluctuating manner. The number
of listed companies is in increasing trend except in the fiscal year 2001/02. The number of
issue approval and amount of issue approval are more or less satisfactory. Amount of
issue approval was in increasing trend after the fiscal year 2002/03.Similarly, amount of
market capitalization and paid-up value are in increasing trend. The growth of NEPSE
Index was in fluctuating manner due to the decline in the investor’s confidence level on
the capital market.

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From the analysis of primary data, it is seen that number of issue managers and brokers
are not sufficient. The growth of market capitalization is satisfactory. Most of the
respondents are agree with following statements, legal rules and regulations are not
sufficient. Information is not easily available to investors; Stock market is greatly
influenced by small number of large investors. There is no special provision to attract
institutional investors in the stock market. Nepalese stock market is the characteristics of
rumor based market. There is insufficient knowledge of investor about the stock market
which is the major problems of the Nepalese stock market. Stock market has also seen
many prospects from the survey. They are: the number of listed companies and turnover
of listed companies are increasing yearly, most of the respondents are agreed with stock
market provides satisfactory return, the growth amount of IPO is increasing, and stock
market provides liquidity and marketability. Similarly trend of large companies listed in
NEPSE and increasing interest of educated and business people are the greater prospects
for Nepalese stock market.

3.2 Conclusion
The development of stock market in Nepal so far cannot be considered satisfactory. This
is evident from the facts and figures available in the stock market performance during the
last sixteen years. This study concludes that the growth rate of amount of issue approval
were more or less satisfactory. The number of issue approval was fluctuating manner over
the periods. So, the growth rate of number of issue approval was not satisfactory.
Similarly, growth rate of number of listed companies are all positive except in one year.
The trend of paid-up value is increasing. But annual turnover value, NEPSE Index and
market capitalization are fluctuating. This indicate that the situation of growth of stock
market in Nepal. On the other hand, it concludes that the investors are facing several
problems and challenges during the transaction period. It is concluded that the major
problems of the stock market are insufficiency of legal rules and regulations,
unavailability of information, influenced by small number of large investors, insufficient
number of brokers and issue managers rumor based market, insufficient knowledge of
investors etc. However, from the analysis of the study, the investors are not realized the
need of new stock exchange.

From the analysis of prospects of Nepalese Stock Market, it is resulted that increase in
number of listed companies, satisfactory return from the stock market, increasing amount
of initial public offerings, increasing trend of large companies listed in NEPSE and

16
increasing interest of educated and business people are the major prospects of Nepalese
stock market. General provision taken by government, on-site and off-site inspection
program launched by SEBON are the minor prospects of Nepalese stock market.
However the transparency and openness of transaction, quality professional services,
adequate corporate financial disclosures and improved legal regulatory and supervisory
are the urgent need of Nepalese Stock Market. The government has to play major role to
encourage individual as well as institutional investors’ participation and sustaining in
stock market any effort for protecting investors

interest or boosting their confidence or developing the stock market is necessary, that
should be enabled to operate in an environment that leads to growth and expansion of
Nepalese Stock Market.

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 BIBLIOGRAPHY

Aryal, M. (1995). The Behavior of Stock Market Prices. An Unpublished MBA Thesis,
Submitted to Central Department of Management, T.U.

Bhalla, V.K (1983). Investment Management, Security Analysis and Portfolio

Management. Bombay: S. Chanda Publishing Company.

Sharpe, W.F, Alexender, G.J. & Bailey, V.B. (2000). Investments. New Delhi:
Prentice Hall of India.
Sherestha, M.K. & Bhandari, D.B. (2007). Financial Markets and Institutions.

Kathmandu: Asmita Publication.

Websites:
www.nepalstock.com

www.sebonp.com

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