Additional Theory for Unit -

7
Significance of market indexes
Market index is the average single number that reflect the economic
indicator of the country. If market index is growing the economic
situations are good and investor confidence towards market is positive.
The main significance of the market index are as follows.
• Guideline to the investors for the investment decisions
• Evaluation of portfolio performance
• Forecasting macroeconomic variables change
• Prediction of future market movements
• Measurement of systematic risk
Construction of an index
The well determined market index gives an indication of the prices of all securities.
The index should be unbiased indicator of the population that the index representing.
The main factors to be considered in index determination process are as follows;
a. Proper Sample size:
- Proper percentage of the population neither small nor large
b. Representative:
-Heterogeneous or representing all sectors and sizes of firm
c. Weighting:
- Price weight, value weight or equally weighting
d. Convenient units:
- Expressing in to easy to understand
Nepal Stock exchange Index (NEPSE)
NEPSE index is an equity index. In equity index measures the change in the
overall market value of common stocks from one date to another date. NEPSE
stared trading floor on 13th January 1994 and started to calculate the market
index. It is based on total market capitalization. The base value of index is
100. The first day of trading carried out through member brokers. NEPSE
includes all the listed stock and their closing prices to determine the index.
NEPSE Index = ×100
In listing or delisting or bonus or right share, the base value is adjusted as
follows;
Adjusted Base Value = × Previous Base Value
Sensitive index
NEPSE index calculate the SENSEX index which consider the only A class companies as provided
in the Securities listing Bye laws, 2075. SENSEX is also equity index and market value basis
index. It is also calculated as NEPSE index. The Base value to calculate SENSEX is 100.

Float index:
NEPSE is also calculating float index which considers only public share in index calculation. It is
market value basis index calculated same as NEPSE index and base value of index is 100.
Sensitive float index considers only public shares of A- class companies in index calculation.
Additional Theory for Unit -
6
Role of Primary Market
Primary market is market where new securities are issued and new
investments are made. The main roles of primary market are as follows.
• Promoting long term investments
• Creating employment opportunities
• Industrial developments
• Revenue generation
• Transfer of resources
• Economic growth
• Mobilization of savings
Legal provision regarding the issue of Securities

The legal provisions regarding issue of stocks and debentures in Nepal

consists primary market related acts, regulations and guidelines.
-Securities Act, 2006
-Securities registration and issue regulation 2009
-Securities guideline, 2009
-Securities allotment guidelines, 1994
-Bonus share issue guidelines, 2002
-Securities listing Bye-laws, 1993
-Companies Act, 2074
Contd……..

• Provisions related to share issue at premium

• Conversion requirement for the private company in to public company

• Credibility and transparency in public issue

• Accountability of the company and directors

• Role of issue manager

• Provision for underwriting

Contd……..

• Track record of one year business operation

• Collection of application forms and money

• Advertisement and fact information

• Issuance of right share

• Issuance of debenture

• Fee and commission of issuing securities

Application & allotment process
(i) Fixed pricing initial public offering (IPO)
Some days after of issue closed, the shares have been allotted. The total investment amount
collected during the application process will always be higher than the requested amount and
all applicants will not get all the shares. First securities are allotted 10 kitta for each applicant.
Remaining shares again allotted 10 kitta and this process will continue till allotment would not
complete. If 10 kitta is not possible to each candidate then lottery system is used to allotment.
(ii) Book building initial public offering
After receiving the intent price from the qualified institutional investor, upper and lower limit
of bidding is set. Many bids received and allotted according to high price to low price. The
last accepted price is the cut off price. At cutoff price all bidders above, cutoff price must be
allotted at cut off price. This is the 40% of total issue amount. Remaining 60% is issued for
the general public at 10% discount at cut off price. The investor must apply for minimum 50
shares.