August 2005
Stock Taking

Attracting Good Cos to Stock Exchange

By Rabindra Bhattarai

The government has announced that beginning the new fiscal year 2005-06, companies listed in the Nepal Stock Exchange (Nepse) will have to pay a 2 percent lower tax than applicable to similar other unlisted companies. This is being done with the intention of motivating companies to go public and list their securities in the stock exchange. This reduction will increase the net profit after tax of the companies if they list their securities. However, this reduction in the tax cannot be expected to affect the listing of the banks, finance companies and insurance companies because there are no new such companies which are unlisted. Those few that are unlisted are already prepared to go to the public and get listed.

The government should have brought a more concrete policy to force or motivate large manufacturing companies like Dabur Nepal, Asian Paints (Nepal), Varun Beverages (Pepsi Cola), Surya Nepal etc to go to the public and list their shares. There is doubt whether these companies will find the 2 percent tax concession as enough motivation. However, it is learnt that the Security Board (SEBON) is trying to convince these companies to go to the public and are being promised permission to issue their shares in premium though the existing Company Law does not allow the issue of shares in premium.

To increase the number of companies listed in the Nepse, the government should take the lead by first privatising large corporations like Nepal Telecom, Nepal Oil corporation, RNAC and Nepal Electricity Authority. Though the government has been repeating the plan to privatise these entities, the progress so far has been very slow. The government also stated to sell the shares of NTC to the public in this year’s budget announcement. But there is doubt on the government’s intention as this company’s capital has been recently stripped by a hefty dividend taken by the government. The company’s condition is worsened by the long delay in allowing it to resume the operation of mobile telephones and thus forcing it to suffer revenue loss.

Fiscal 2004-05 in Retrospect

The fiscal year 2004/05 remained good for the Nepali stock market. All the statistics showed an increase over the fiscal year 2003/04 (see tables). During the year 2004/05, the banking sector remained as dominant as ever occupying 89 percent of the total turnover.

The last month of the year (i.e. July 2005) remained bullish as forecast in the previous issue of New Business Age. But in the coming days it is expected to turn bearish again.

This bearish trend is likely to continue until early September when Siddhartha Bank Ltd. is expected to issue its share to the general public. Also the public issue of the Chilime Hydropower Limited will further affect the secondary market. The investors will turn to invest in the primary market by selling their holding in the secondary market. Normally, the market falls during the new issue of the banks and financial institutions and other companies that have a good image in the market. The impact of the primary issue of the Siddhartha Bank can be a significant one because recently no commercial bank has gone to the public through primary issue.

With the announcement of the budget the securities market went up with the Nepse index crossing 300 points—a four year high. But in reality it was not the effect of the budget. It was simply the continuation of the market sentiment from July, which remained bullish throughout. This sentiment will remain only during the early days of August. It will decelerate during the rest of the month.

During the month of July, a new movement was observed in the Nepse index. Though the month saw an increase in the index, the daily movement was following a cyclical manner—one day it went up to fall the very next day again to move up in the following day (see figure).

The month also remained significant from the point of the volume of trading. Many transactions were large volume transactions (see table). Out of them, the units of NCM Mutual Fund remained the dominant ones. Similarly, the shares of NIC Bank, Nepal Bangladesh Bank and United Finance Company were traded in large volumes. Clearly, these shares were sold to take the benefit of the bullish market, mostly by the promoters of the companies. Similar activities were recently observed in the Indian stock market where many promoters sold a portion of their holding to take the benefit of the current bullish market.