NEPSE the only Stock Exchange in Nepal has replaced the open cry trading system with fully automated screen based trading since 24th August, 2007 under the CFG project of Government of Nepal aided by Asian Development Bank.

The NEPSE trading system is called ‘NEPSE Automated Trading System ‘(NATS) is a fully automated screen based trading system, which adopts the principle of an order driven market.

According to this system, when there are two orders placed for a security in the market, the system matches the best buy order with the best sell order. An order may match partially with another order producing multiple trades.

For order matching the best buy order is the one with the highest price and the best sell order is the one with the lowest price. This is because the system views all buy orders available from the point of view of the sellers and all sell orders from the point of view of the buyers in the market.

So, of all buy orders available in the market at any point of time, a seller would obviously like to sell at the highest possible buy price that is offered. Hence, the best buy order is the order with the highest price and the best sell order is the order with the lowest price.

One should first be registered in this system, to do so one need to go to broker. Then the broker through Client Management service provided in the system register the interested party as a client. Without creating a client the broker will not be allowed to place order for that particular client. The broker has to insert various details of the client out of which client code is a unique code for that particular client for a particular broker. After a broker receives the order the broker has to place order for that client on FIFO basis of the order registered by the client’s in the broker’s office

Order is an expression of interest to either buy or sell a specified quantity of stock either at a specified price or at the current market price. To make any buying and selling activities of the securities in the secondary market, the investors must go through the channel of Brokers as per the Securities Exchange Act of 1983; this act also prohibited these brokers to make transactions without getting orders from their clients.

So before an investors wants to involve in the activities of buying and selling of securities, s/he first need to register in the broker terminal as a client for which certain information and documents need to be provided to broker through which client code, unique code of the particular client for a particular broker, is generated.

After registering, in future date if a broker receives the order then the broker has to place order for that client on FIFO basis of the order registered by the client’s in the broker’s office. The orders can be Buy and Sell order.

• Buy Order

It is the order placed by buying brokers to purchase the securities on behalf of his clients/investors. In this order, s/he has to mention clearly the name of the companies, the number of securities that s/he wants to buy and the validity of the orders. If the validity period of the order is not mentioned, it will be valid for only 15 days.

• Sell Order

It is the order placed by the selling client to the broker to execute the transactions. In this order too, the client has to mention the name of the company, number of securities, prices of the securities that s/he wants to sell for and the validity period of the orders. If the validity period of the order is not mentioned, it will be valid for only 15 days.

It should be noted that all the required information either for buying or for selling of a stock should be submitted by the broker.

Fixed-Price:

In this the investors can state the fixed price for the purchase and sell of the securities in which the brokers are not allowed to execute at higher and lower than the stated price.

Range:

In this investors can quote the price in range where they give certain liberty to his/her brokers to negotiate and execute the transactions on his/her behalf. S/he can also quote the maximum and minimum price for buying or selling shares in order to maximize gain or minimize loss because of intra-day price fluctuations.

Open Price

In this the investors don’t state any price level but solely leave it to the brokers to execute the transactions at the appropriate price or the market price. In this situation, the investors must have full trust with the brokers.

There are three phases during which the broker can place the order to execute the transactions. Such phases are: 

At the Open (ATO):

ATO indicates the order should be executed when the market opens. In order to execute the transactions at ATO the member brokers have to place the orders to execute it at ATO. All the ATO orders will be accumulated in the system till ATO execution time and after the time reaches the ATO orders will be executed at the best price at the opening of transactions.

ATO gives the price, quantity and time priority for the execution. At the present Nepse has set 11:30 A.M. to 11:55 A.M. during which brokers can place ATO orders. The engine calculates the best price and matches the order at 12:00 noon i.e. when market opens. In this case price can be quoted within the range of 5 percent of previous close price. Once the ATO phase is over price can be quoted within the range of 2 percent of LTP. ATO determines the opening price of the stock. If there is no matchavailable for ATO orders of a stock, then the open price of the stock will be equal to the previous close price.

Continuous Trading:

This is the phase that indicates the orders should be executed while the market in progress.

At the Close (ATC):

This is the last phase that indicates the order should be executed when the market closes. The system has provided facility to generate the ATC price of a stock either by taking the average of the price of last n transactions or the average of the price of the last n minutes.

Currently Nepse adopts the average of last n transactions where n equals to 1 i.e. the LTP of the stock at close is the ATC price of closing price.

ORDER LIFE

Customer can give order to retain until the specified period as below unless it is executed.

End of Day (EOD): This indicates the placed orders if not executed will be retained until end of today.

Good Till Cancel (GTC): This indicates the order if not executed should be retained unit it is cancelled. The system has provided facility for exchange to set the time period in days till which the pending orders can be retained in GTC.

Nepse has adopted order driven market system. So each and every order entered should be backed by written order. In those orders the clients must specify the validity period of the orders but if they do not mention the time period the order will be valid for 15 days. In this case GTC will be 15 days.

One can specifies the conditions under which the order could be executed. The conditions are as below:

None:

This indicates there are no conditions for execution of orders.

Immediate or Cancel (IOC):

This condition indicates that the orders should be executed in full or part immediately if not execute immediately the unexecuted order will not be sent to Public order book but cancelled immediately by the system.

 Fill or Kill (FOK):           

This condition indicates the order must get executed entirely or cancelled immediately. The unexecuted order is not sent to public order book but killed (cancelled) by the immediately. Nepse has modified the system allowing entering the quantity of a stock to be traded either at the multiple of lot size or greater than that.

All or None (AON):

This condition indicates the order must get executed entirely and if not executed the order is sent to public order book. In this condition too, Nepse has modified the system allowing entering the quantity of a stock to be traded either at the multiple of lot size of greater than that.

BT is simply a system of not sending the bought share certificate for name transfer in the company but only recording in the system of Nepse. This mechanism is mainly opted to grab the opportunity provided through the market volatility. As the Name transfer is lengthy process, those who choose to make short term investment prefer to go for BT.

But presently, brokers must complete the BT process within T+5. The transactions that executed can be recorded in different way and Nepse has considered all possible retention. The followings are the major key points to be considered.

• This is related only with buy of the securities.
• The buyer may decide to have market benefit either to have capital gains or to minimize the loss.
• In order to do this s/he may partly send for name transfer or may register it in blank transfer.
• If investors register total purchase in blank transfer then they can put share for sale at any time. But in the future date, the investors opt to go for name transfer after registering in the BT; s/he can do so by cancelling the BT and forwarding the shares to the concerned company for name transfer.

NEPSE has implemented new index-based circuit breakers with effect from (April 2019). Index-based Circuit Breakers or market halt system applies at 3 stages of the Nepse index movement on either way by 4%, 5%, and 6%. These circuit breakers when triggered bring about a trading halt in all equities.

• In the case of 4%, movement, either way, there would be a market halt for 20 minutes if the movement takes place during the first hour of trading i.e. 12:00 hours. In case this movement takes after 12:00 hours there will be no trading halt at this level and market shall continue trading.
• In the case of 5% movement, either way, there would be a market halt for 40 minutes if the movement takes place before 13:00 hours. In case this movement takes after 13:00 hours there will be no trading halt at this level and market shall continue trading.
• In the case of 6% movement, either way, trading shall be halted for the remainder of the day.

Price Range is applicable on individual securities. The trading of the individual securities are not halted but allowed to trade within the price range.

The price band is 10 percent of previous close on either way. During the ATO (At the opening) session the range is 5 percent on either way of previous close price. After the band is 2 percent on either way of the last traded price till it reaches to 10 percent of the previous close.

Price Range is applicable on individual securities. The trading of the individual securities are not halted but allowed to trade within the price range.

The price band is 10 percent of previous close on either way. During the ATO (At the opening) session the range is 5 percent on either way of previous close price. After the band is 2 percent on either way of the last traded price till it reaches to 10 percent of the previous close.

A. Charges on Buying Securities

When an investor is engaged in buying activities, every time s/he needs to pay following types of charges per buying transaction:

• Brokerage Commission (ranges from 0.4% to 0.6% of per transaction amount)
• Fee to SEBON (fixed 0.015% of transaction amount)
• DP charges Rs 25 per company.

B. Charges on Selling Securities

When an investor is engaged in selling activities, every time s/he needs to pay following types of charges:

• Brokerage Commission (ranges from 0.4% to 0.6% of per transaction amount)
• Fee to SEBON (fixed 0.015% of transaction amount)
• DP charges Rs 25 per company.

Net Profit = Selling Price – Buying Price – Commissions to brokers – Charges of SEBON

1.   For Cash Dividend

The shareholders are charged 5% tax for the cash dividend paid by the companies.
For e.g., if a shareholder receives Rs 1,000 as Cash Dividend then s/he is oblige to pay 5% of Rs 1,000 i.e., Rs 50 as a tax for Cash Dividend.

2.   For Bonus Share

Similarly, for the Stock Dividend or Bonus Share also the shareholders are charged 5% tax on the par value of Bonus Share distributed by the companies.

For e.g. if a shareholder receives 10 bonus shares from a company, then the  face value of Bonus Share will be 10*100 (assuming Rs 100 as its par value)= Rs 1,000 and the Bonus share Tax will be 5% of 1,000 i.e. Rs 50.

3.   For Capital Gain

As per the prevailing tax rule of the country, following is the tax levied on the individual and institutional investors:

• Capital Gain Tax for Individual: 5% of Net Profit
• Capital Gain Tax for Institutional Investors: 10% of Net Profit

If an investor obtains profit through selling a share then s/he will be obligated to pay the 5% tax on the profit amount less the broker and SEBON commission, to the Government of Nepal as capital gain tax.

For doing a buying and selling transaction of shares, the investors need to go through the channel of brokers for which brokers charge certain amount of commission accord to the nature and size of the transactions which is mentioned below:

A. Brokerage for equity

B.Brokerage for Government Bond

C. Brokerage for all other stocks which is not listed in 1 and 2.

The brokerage commission is not the net revenue of the broker. It is distributed as follows:

• 25% of the brokerage is paid to NEPSE. Then,
• 15% of the remaining brokerage is deducted as TDS (Tax Deducted at Source). i.e. (100% broker commission – 25% paid to Nepse) * 15% = 11.25%.
• And the remaining amount is retained by concerned Broker i.e. (100% – 25% – 11.25 %) = 63.75%

Apart from the above mentioned broker commission, the investors are also required to pay 0.015% transaction charge to SEBON. And separate Rs. 5 per transaction (Buying), as name transfer charge.

Note: The rate of commission is charged on the transaction amount.

NEPSE facilitates trading in the following instruments

1. Stocks

• Common Stocks
• Preference Stocks

2. Bonds

• Debentures
• Government Bonds
• Power Bonds

3. Mutual Funds

Listing, which is one of the major functions of Nepse, is a process of admitting different types of securities to be traded on the floor of stock exchange. Listing is the first step towards the secondary market which provides liquidity and marketability to the scrips issued to general public at primary market. In 1994, Nepse started its trading with 62 listed companies. From 2005 government bonds are being listed and traded at Nepse floor. At present there are 226 companies listed in Nepse. Similarly, 19 government bonds and 14 corporate bonds are also listed for trading purpose.

For any securities to be listed in secondary market of Nepal, the securities should be firstly issued and allotted by a corporate body then only the company’s security will be eligible for transaction in secondary market.

To list the securities by the corporate body in the market, following steps need to be carried out

1. Application to be submitted for the Listing of the Securities

In order to the listing of the securities issued and allotted, Corporate Body shall submit an application along with other necessary documents to the Stock Exchange.

2. Then the inquiries into Application is done by stock exchange

After receiving the application form, Stock Exchange shall conduct necessary inquiries with regard to the application and particulars and documents received along with application and while conducting such inquiries, the Stock Exchange shall also examine within 15 days of submission of such application whether or not the economic, financial and business condition of the Corporate Body is satisfactory, as well as the arrangements made for the consolidation, sub–division, registration of transfers or transactions, etc. of securities, the issued and paid–up capital of the Corporate Body, the number of its shareholders, and the dynamism of its transactions and during the inquiries if it deems so necessary it may demand additional documents, particulars or information from the concerned Corporate Body.

3. In case additional documents, particulars or information are demand, it shall be the duty of the concerned Corporate Body to submit the same within 7 days from the date of such demand.

4.  In case the Stock Exchange, after inquiry, deems it–appropriate to list the securities it shall, within 30 days of receipt, notify the Corporate Body of the fact that securities are listed in the format as per regulation. In case in deems in inappropriate to list the securities the fact shall also be notify to Corporate Body within 30 days of receipt of application.

5. If corporate body’s securities get approved for listing then Stock Exchange should entered into the listing agreement with the concerned Corporate Body accord to standard format of the exchange.  In this agreement necessary preconditions for Listing of Securities will be mentioned

(a) In case the securities to be listed are Ordinary Shares:

(i) The paid–up capital must be at least Rs. 2.5 million.

(ii) The number of shareholders must be at least 500.

Provided that in the case of a Corporate Body which has not yet issued share publicly, its securities may be listed on the condition that the required number of shareholders will be reached within two years from the date of listing.

(iii) The face value of the share must be either Rs.10 (Ten) or Rs.100 (One hundred).

(iv) At least 25% of the shares, in case the issued capital does not exceed Rs.10 million but not more than Rs. 50 million, at least 15%, in case the issued capital is more than Rs. 50 million but not more than Rs.100 million, and the percentage of the shares fixed from to time by the Stock Exchange with the prior approval of the Securities Board, in case the issued capital exceeds Rs.100 million, must have been sold or allotted to the public, or set aside for public sale, In the case of a Corporate Body which has not yet issued and sold its shares publicly, it must issue and allot shares within time as fixed by Stock Exchange and attain the prescribed percentage.

(b) In case the securities to be listed are Preference Shares, Debentures, Unit Saving Scheme Certificates or Mutual Saving Scheme Certificates:

(i) Securities amounting to at least Rs. 5 million in the case of Preference Shares or Debentures, and at least Rs. 20 million in the case of Unit Saving Schemes or Mutual Saving Schemes, must have been issued and allotted.

(ii) The number of holders of Preference Shares, Debentures, or Unit Saving Scheme or Mutual Saving Scheme certificate must be at least 200.

(iii) The face value of the securities must be either Rs. 10 (Ten) or Rs. 100 (One hundred), Rs. 1,000 (One thousand).

(iv) The Ordinary Shares must have been listed.

Provided that in the case of the Corporate Body on which His Majesty’s Government or a Corporate Body with His Majesty’s Government’s ownership amounting to more than 50%, it shall not be compulsory to have the Ordinary Shares listed.

(v) In case the securities are redeemable, the remaining term thereof must be at least one year.

Apart from the above mentioned criteria in the agreement, the corporate body will also be liable for providing information of the company, which can affect the price of securities, to the Stock Exchange immediately. Then, the Stock Exchange shall publish a notice thereof in prominent newspapers of the information of general public investors.

After all the agreement is completed, the transactions of listed securities may be commenced after 7 days from the date of publication of the notice of listing in newspapers. To carry out the service of listing in the Stock Exchange, the corporate body will have to bear certain charge accord to the nature of the securities which is mentioned in the heading of listing fee and annual fee.

For Equity

For Debentures and Mutual Funds

As per the provision provided by listing Byelaws, there is two types of listing which is mentioned below:

• Ordinary Shares, Irredeemable Preference Shares, Debentures or close–ended Unit Saving or Mutual Saving Certificates shall be listed on a permanent basis.
• Redeemable Preference Shares or Debentures shall be listed on a temporary basis.  Securities which have been listed on a temporary basis may be transacted only up to 15 days before the expiry of their period of listing.

Whereas the classification of the listed securities is categories into two groups as Group A and Group B. Nepse classifies the listed companies at the end of (Mid January to Mid February) every year. The companies which comply with the following conditions are classified at Group A.

• Number of shareholders must be more than 1000.
• The company must be in profit  at least for the last three years.
• Corresponding companies must provide their audited or provisional financial reports till Poush (December- January) end of the fiscal year within 6 months form the date of expiry of the financial year.
• The Paid up capital of the company must be 20 million.
• Book value per share must not be less than the paid up value.
• Shares should have been sold publicly

The companies which do not comply with the given requirements are classified at group B. However, currently the Nepse is under process of developing new bylaws where there will be provision of four categories—A, B, C and D. The category ‘A’ will represent companies that generate a high profit and provide higher rate of return to its shareholders consistently. The category ‘B’ will have companies that are profitable but are not paying dividend to its shareholder. Similarly, the category ‘C’ comprises newly listed companies, while the category ‘D’ will include the companies whose performance is degrading and are struggling to sustain.