Capital Market

Abstract:
Capital market in any country plays a pivotal role in the growth of economy and meeting countrys
socio economic goals. They are an important constituent of the financial system, given their role in the
financial intermediation process and capital formation of the country. The importance of the capital
market cannot be underemphasized for developing economy like Nepal which needs significant
amount of capital for the development of strong infrastructure. The entire paper is divided into three
parts. In the first part we have discussed the conceptual framework of the capital market and in the
next section; we have focused on the trends in the capital market in Nepal. In the third section, we
have discussed various issues and challenges of the capital market in Nepal.

Definition:
Capital market is the financial market for the buying
and selling of the long term debt or equity backed securities. The market channels the
wealth of savers to those who can put it to long term productive use. Capital market
constitutes an important part of the financial market. It relates to those markets from
where government, households, firms and industries secure long-term capital needs
through the use of a wide variety of long-term financial instrument and other securities. It
is the market for those financial instruments that are brought and sold with maturities
greater than one year. Thus, capital markets are for longer-term debt instruments and
stocks. Capital market securities include such marketable debt securities with maturities
of a year or more and equity securities. Most of associated markets come under the scope
of capital market. Modern capital markets are hosted on computer based electronic
trading system which can be accessed by entities within the financial sector. The capital
market can be divided into:
1) Primary Market: It deals with issue of new securities .Companies, government, and
public sector institutions can obtain funds through sale of new stock or bonds issue
such as IPOs that are placed with investors through underwriters.
2) Secondary Market: It is also called liquid market. Secondary markets deals with the
exchange of existing or previously-issued securities in this market the securities are sold
by or transferred from one investor to another. Thus, this market gives liquidity to the
long term securities.
In fact, capital market deals with longer-term and relatively
riskier securities. Treasury bonds are an example of capital market just as Treasury Bills
are an example of money market. All those who need longer-term funds depend on
capital market. As for instance, government goes very often in capital market by selling
long-term claims on their state-owned enterprises and industries issue shares and other
securities to meet operating funds. Likewise, business and industries issue shares and
other securities to raise funds from capital market. Thus capital markets help in transfer

of funds from savers to borrowers and secondary capital market allows investors and
financial institutions to alter the liquidity, risk and portfolio composition in one way or
the other.
The range of participants in capital market is much wider and participants create financial
instruments that will fit the requirements of special cases- a kind of market for in tailormade financial instruments. Developers called capital market as creative finance while
others called it as finance facilitating and service center.
In the context of Nepal, capital market is slowly growing
as well as improving. Growth of capital market has made it possible for the public limited
companies to raise the long-term capital by issuing shares and other industrial bonds to
the investing public. In this regard, SEBOPN has been active enough to promote capital
market both in primary market and secondary markets transactions.
SEBON has allowed primary issues of Rs.2295.5 million in 2006/07 for 34 companies.
Market capitalization has recorded Rs.186.3 billion in secondary market.
In fact, public confidence has grown very positive. There is a record of over subscription,
as the shares floated by every company became a success. The projected results in
prospectus continue to become a strong document of public belief. It means investing
public attracted to invest in shares with the trust that promoters managing company will
generate return sufficient to meet the expectations of investors. This is how capital market
has taken a very optimistic outlook. But things change afterward as many of the
manufacturing public limited companies like Jyoti Spinning Mill, Gorakhkali Rubber,
Butal Dhago, Indreyani Soyabean, Kathmandu Distillery, etc.,could not flourish in a
manner consistent with the needs of investors. But, there are also success cases relating to
government banks, finance companies, insurance companies and few manufacturing and
service industries.
On the whole, capital market is proving very significant to enhance the country's financial
sector development. This is in coincidence to the government's financial sector reform
policy supported by World Bank, Asian Development Bank, and other donors in addition
to the vital role played by the regulating authorities like Nepal Rastra Bank, etc. At
present, capital market is proving to be strong aspect of financial market in the country in
view of continued revival of the public confidence for bringing significant rise in share
price.
In Nepal, the growth of primary market and secondary market due to active involvement
of issue managers, investment bankers and commission brokers brought a significant
impact on capital market, as per available date in 2006/07. Primary issues have mobilized
funds amounting to Rs.2753.7 million that consists of 34 companies. At the same time,
secondary market has been created since the market capitalization has grown to Rs.186.3
billion raising NEPSE index to 683.95 points.