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PRAY FOR RASUWA, NEPAL

Nepal Share Market - Beginner Guide: Part 2

This comprehensive guide combines the core principles of secondary market operations, corporate shareholder returns, key financial institutions, and low-risk primary market entry strategies to help new investors navigate Nepal's stock market (NEPSE) with confidence.

Holding equity shares—whether just a few unit "kittas" or a sizable portfolio—makes you an actual partial owner of a corporation. In the primary market, shares carry a fixed par value (typically NRs. 100). Once listed, trading transitions to the secondary market, where real-time prices fluctuate constantly based on supply and demand dynamics.

Investors capture value through two primary avenues: capital appreciation (purchasing shares at lower prices and selling when market valuations rise) and participating directly in company earnings through structured corporate distributions.

Methods of Returns for Shareholders

1. Bonus Shares (Stock Dividends)

When a listed company generates substantial profits, it may distribute additional units of stock (bonus shares) to its shareholders free of charge instead of paying cash.

Practical Example: If you own 20 kittas of company XYZ and the board approves a 25% bonus share issue, you will receive 5 additional kittas (25% of 20) directly credited to your DEMAT account without paying for the new stock. While your initial purchase cost was NRs. 100 per share (NRs. 2,000 total), your portfolio now holds 25 kittas. If the stock trades higher in the secondary market (e.g., NRs. 300 per kitta), your total holding value increases significantly. Conversely, if the company incurs losses, no bonus shares will be distributed, and secondary market prices may fall below par value.

2. Cash Dividends

When a company already holds sufficient capital and does not need to expand its share base, it distributes profit directly as cash dividends into shareholders' linked bank accounts.

Practical Example: A 25% cash dividend on 20 kittas yields NRs. 25 per share, resulting in a total payout of NRs. 500 (25 × 20).

Dividend Tax Payout Rules

A mandatory 5% withholding tax applies to both cash dividends and bonus shares. On a NRs. 500 cash payout, NRs. 25 is deducted as tax, yielding a net payout of NRs. 475. For bonus shares, shareholders may need to deposit the 5% tax amount before the bonus units are released into their DEMAT account.

3. Secondary Market Trading Profits

Beyond corporate distributions, investors capture returns through price appreciation in the secondary market by executing buy and sell transactions via licensed brokerage platforms.

Understanding Right Shares

When an existing company requires additional equity capital for business expansion, it offers Right Shares exclusively to its current shareholders at the base price of NRs. 100 per share, regardless of its higher valuation in the secondary market.

Practical Example: If you hold 25 kittas after receiving bonus shares and the company announces a 40% Right Share issue, you are eligible to purchase 10 additional kittas (40% of 25) at NRs. 100 per share (NRs. 1,000 total investment). Because market trading prices are often higher than NRs. 100, subscribing to right shares allows existing owners to expand their position at a discount.

Low-Risk Entry Channels for Beginners

Developing trading expertise requires time, market observation, and practice. Beginners looking to minimize risk can enter the market through lower-risk primary issuances before engaging in active secondary market trading.

Initial Public Offering (IPO) Strategy

IPOs allow companies to raise capital directly from the public, giving subscribers ground-floor equity ownership at par value (NRs. 100 per kitta).

  1. Application Limits: A minimum application usually requires 10 to 50 kittas (starting from NRs. 1,000 to NRs. 5,000).
  2. Lottery Allotment: High demand means IPOs are often oversubscribed many times over. Shares are typically allotted via a computer lottery, usually distributing 10 kittas per winning applicant.
  3. Family Accounts Strategy: To increase allotment chances across high-demand IPOs, families often open separate DEMAT and C-ASBA accounts for each member to submit individual applications. Unallotted funds are automatically unblocked in your bank account.

Further Public Offering (FPO) Mechanics

An FPO occurs when a previously listed company issues additional shares to the public to raise additional capital.

  • Premium Pricing: FPOs are often issued at a premium above par value (NRs. 100), based on secondary market pricing.
  • Value Opportunities: For instance, when Standard Chartered Bank issued an FPO at NRs. 1,290 per share (NRs. 100 par + NRs. 1,190 premium), its secondary market price was around NRs. 1,800, creating a NRs. 500 per share discount margin for subscribers.
  • Minimum Subscription: Most FPOs require a minimum 10-kitta application and follow lottery rules when oversubscribed.

Key Market Institutions

To participate safely in secondary market trading, it is essential to understand the regulatory and operational entities governing the financial ecosystem:

1. Nepal Securities Board (SEBON)

SEBON serves as the primary market regulator, ensuring fair trading practices, authorizing public issues (IPOs, FPOs, Rights), and supervising market intermediaries.

2. Nepal Stock Exchange Limited (NEPSE)

NEPSE is the sole state-backed stock exchange platform facilitating daily secondary equity transactions.

NEPSE Trading Hours

Trading takes place Sunday through Thursday (11:00 AM to 3:00 PM) except on public holidays. The market remains closed on Fridays and Saturdays.

3. CDS and Clearing Limited (CDSC)

CDSC operates the electronic depository and clearing framework. It runs MeroShare for portfolio management and the official allotment portal: iporesult.cdsc.com.np.

Getting Started in Secondary Trading

Step-by-Step TMS Onboarding

  1. Select a Licensed Broker: Choose one of the 90 licensed stockbrokers operating in Nepal.
  2. Open a TMS Account: Register for NEPSE's Trade Management System (TMS) via your broker's portal by submitting your Know Your Customer (KYC) documentation.
  3. Activate Credentials: Once verified, reset your temporary password using the verification link sent to your registered email.
  4. Link Connect IPS: Integrate your primary bank account via Connect IPS to handle digital payments for buying and selling shares.

Taxes, Fees & Settlement Rules

Secondary market trading is subject to clear regulatory and tax guidelines:

  • Capital Gains Tax (CGT): Individual investors pay 7.5% CGT on profits from shares held longer than 365 days, and 10% CGT for short-term holdings (365 days or less). Corporate entities pay 10% CGT. Taxes apply strictly to net capital gains.
  • Broker Commissions: Regulated by SEBON, broker commission rates range between 0.24% and 0.36% based on trade volume.
  • Collateral Advance: Traders must deposit collateral in their TMS account prior to executing buy orders.
  • T+2 Settlement Cycle: Purchased stock is delivered to your DEMAT account within 2 business days (T+2) following complete payment clearing.
  • EDIS & Penalties: Sellers must complete Electronic Instruction Slips (EDIS) via MeroShare by T+1 day. Delivery defaults incur an automated 20% closeout penalty on the transaction amount.

Navigating Risks & Unethical Market Practices

Market prices do not move exclusively upward. Be vigilant against illegal activities and speculative price manipulation:

  • Insider Trading: Executing trades using non-public, confidential corporate information.
  • Cornering: Accumulating floating stock in low-cap companies to restrict supply and artificially push prices up.
  • Ramping: Inflating buying volume right before market close to simulate false momentum.
  • Pooling: Coordinating trades across multiple accounts to manufacture artificial trading volume.
  • Organized Runs: Circulating deceptive rumors to suppress or inflate stock valuations artificially.

Evaluating Companies for Long-Term Growth

To protect capital and construct a resilient long-term portfolio, conduct thorough fundamental analysis using corporate financial reports available on official portals like ShareSansar, Merolagani, or NEPSE. Key metrics include:

  • Consistent revenue growth and business expansion trends
  • Earnings Per Share (EPS) and Return on Equity (ROE)
  • Reserve fund accumulation and balance sheet health
  • Historical dividend distribution track record
  • Price-to-Earnings Ratio (P/E Ratio) relative to industry peers
  • Corporate governance, management transparency, and sector growth outlook