Monday, August 29, 2011
Links for August 29, 2011
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The BIG NEWS: Baburam Bhattarai becomes the 35th (and the most educated) Prime Minister of Nepal. Here is his short profile.
1. Half of households have one member abroad
2.Banks deposit growth rate slows down
32.25 percent in 2008/09
12.9 percent in 2009/10
10 percent in 2010/11
3. Strike cripples life in 9 eastern districts
4. Protesting Mustang folks warn of barring tourist entry
5. Preparation for Dashain; NRB ups note circulation by 40pc
6. Only 10 companies hold 56 percent of Nepal stock exchange's total market capitalization
Company// Share in total market capitalization(%)
Nepal Telecom// 19.43
Standard Chartered Bank// 8.95
Nabil Bank// 7.85
Nepal Investment Bank // 3.83
Himalayan Bank// 3.56
Nepal SBI Bank// 3.26
Everest Bank// 2.81
Bank of Kathmandu// 2.40
Butwal Power// 2.32
Chilime Hydropower// 1.85
7. NOC hikes diesel, kerosene price by Rs. 1.50 per litre
8. Buddha Air tops domestic carrier operations
32.05 percent in 2009
19.82 percent in 2010
4.98 percent in 2011
9. Nepalese Internet ...some numbers
*65,000 subscribers at the end of 2009/10
*52,527 subscribers at the end of 2010/11
*Between 2009/10 and 2010/11, number of dial-up users lowered by 33 percent
*Between 2009/10 and 2010/11, number of wireless users increased by more than 70 percent
*Between 2009/10 and 2010/11, wireless users increased by 10,000
*Worldlink is the leading internet provider with 19,858 subscribers
*Broadlink is second with 11,792 subscribers
*Mercantile Communication has 9,445 users
*Subisu Cablenet has 5,276 users
*Web Surfer has 958 users
*Internet penetration of the country has reached 10. 89 percent as of mid-June 2011
*But, nearly 98 percent the total users are GPRS users
The BIG NEWS: Baburam Bhattarai becomes the 35th (and the most educated) Prime Minister of Nepal. Here is his short profile.
1. Half of households have one member abroad
...52.8 per cent of the total households have at least one member away from home...indicating the startling rise in loss of human capital in the country
...32 per cent families have members away in foreign countries...55 per cent of the total households receive remittance from the members abroad
...Over 354,000 Nepalis left the country last fiscal year to work in foreign destinations...and...that has created dearth in agricultural and industrial labour back home
...Nepal earns about Rs 210 billion from remittance coming in from abroad annually...but...79 per cent of total remittance is spent on daily consumption...and...only a meagre 2.4 per cent of the remittance contributes to capital formationAlthough there are people in Nepal that praise remittance for its role in reducing poverty and inequality (both of which have NOT been proven empirically by any studies), there are some aspects of this heavy role of remittance that do not bode well for the country in the long run, especially because:
...empirical evidences also show that the development process of the economy that is dependent on remittance is relatively slower by about 1.5 percent
2.Banks deposit growth rate slows down
...average deposit growth rate slowed down by more than two times compared to a fiscal year agoDeposits in the commercial banks grew by:
32.25 percent in 2008/09
12.9 percent in 2009/10
10 percent in 2010/11
Deposits with Janata Bank saw surging by 300 percent...Rastriya Banijya Bank has the largest deposit base with Rs 74 billion...Nepal Investment Bank has Rs 50 billion deposits
...saving and credit cooperatives were found to be mobilising deposits worth Rs 122 billion
3. Strike cripples life in 9 eastern districts
...the demand is to make Taplejung, Panchthar, Ilam, Jhapa, Morang, Sunsari, Dhankuta, Sankhuwasabha and Terhathum districts...into the Federal autonomous Limbuwan state
4. Protesting Mustang folks warn of barring tourist entry
...unless the government allocates 60 percent of the tourist royalty for the development of the region
Upper Mustang has not received its share as provisioned by the Local Self Governance Act for the last 16 years...despite the government of Nepal collecting...Rs 770 million in revenue annually through tourism from Upper Mustang since 1993...The government only provides ...a nominal Rs 70 million to the district. As a result, the region still lacks electricity, roads, schools and hospitals. Food shortage is a perennial problem as the topography of Upper Mustang is unfavourable for crops.
2,162 tourists visited Upper Mustang in 2010, up by 30.3 percent compared to the previous year
5. Preparation for Dashain; NRB ups note circulation by 40pc
...Last Dashain saw use of notes worth Rs 20 billion...According to NRB, it is sending clean notes worth around Rs 28 billion for this year’s Dashain
6. Only 10 companies hold 56 percent of Nepal stock exchange's total market capitalization
Company// Share in total market capitalization(%)
Nepal Telecom// 19.43
Standard Chartered Bank// 8.95
Nabil Bank// 7.85
Nepal Investment Bank // 3.83
Himalayan Bank// 3.56
Nepal SBI Bank// 3.26
Everest Bank// 2.81
Bank of Kathmandu// 2.40
Butwal Power// 2.32
Chilime Hydropower// 1.85
7. NOC hikes diesel, kerosene price by Rs. 1.50 per litre
The price of the diesel and kerosene has now reached Rs. 75 per litre from Rs. 73.50 per litre....the price of petrol is constant at Rs. 102 per litre which was increased from Rs. 97 some two months ago
8. Buddha Air tops domestic carrier operations
...in the first half of 2011 with a market share of more than 40 percent
The airline recorded an increment of 21.73 percent in passenger carriage. Except for Buddha Air and Sita Air, all the domestic carriers posted a negative growth in their passenger movement in the first six months.
Buddha’s nearest competitor Yeti Airlines saw its passenger movement dip by 1.55 percent. However, the airline is still the second largest carrier in domestic aviation with 224,062 passengers flying it in the first half of 2011.
...domestic airlines carried 761,043 passengers in the first six months, up 36,160 from last year...Rate of Growth in Passenger Movement in first-half of the year:
32.05 percent in 2009
19.82 percent in 2010
4.98 percent in 2011
9. Nepalese Internet ...some numbers
*65,000 subscribers at the end of 2009/10
*52,527 subscribers at the end of 2010/11
*Between 2009/10 and 2010/11, number of dial-up users lowered by 33 percent
*Between 2009/10 and 2010/11, number of wireless users increased by more than 70 percent
*Between 2009/10 and 2010/11, wireless users increased by 10,000
*Worldlink is the leading internet provider with 19,858 subscribers
*Broadlink is second with 11,792 subscribers
*Mercantile Communication has 9,445 users
*Subisu Cablenet has 5,276 users
*Web Surfer has 958 users
*Internet penetration of the country has reached 10. 89 percent as of mid-June 2011
*But, nearly 98 percent the total users are GPRS users
Labels: airlines, banks, cooperatives, dashain, internet, migration, mustang, NRB, petroleum, remittance, share market, shutdown
Thursday, June 30, 2011
Rights Shares: Wrong News
Issuing rights shares has become too common in Nepal now-a-days. Everest Finance, Birat Laxmi Bank and Bank of Asia published notices for rights shares on April 8. Malika Bikas Bank on April 10, and Royal Merchant Banking and Finance Limited on April 20 could not sell the rights shares issued to promoters, and had to start auctioning them. Kaski Finance Limited on April 13, Lord Buddha Finance Limited on April 18, Sunrise Bank Limited on April 20 announced opening for rights shares. There are more examples from the months before.
On the face of it, the concept of issuing rights shares seems harmless and innocuous. The shareholders buy more shares from their company, often at lower prices, and help raise capital for their company. And, that is all that the CEOs, Directors and promoters of these financial institutions think will happen when they announce rights shares. It is clear that they have not learnt any lessons from the history of rights shares issued by other financial institutions.
If you observe the share prices of the financial institutions that have issued rights shares in the past, a couple of patterns are immediately noticeable.
First, financial institutions, generally, tend to announce rights shares when the price of their shares starts falling. The falling share prices cause the institutions to come up with extra cash to balance their accounts. So, the institutions that tend to announce rights shares are usually the ones that seem to be in trouble.
Second, share prices tend to fall even further after the announcement of rights shares. So, announcing rights shares could help the institutions collect some capital, but it lowers the price of each unit of share in the market. Although the intention of announcing rights shares might have come out of necessity for generating more capital, the announcement actually ends up hurting the financial institutions’ standing in the market.
This trend holds true for almost all the financial institutions that have announced rights shares in the past. So, the evidence suggests that issuing rights shares does not help the financial institutions. Why, then, do Nepalese financial institutions keep issuing rights shares? Is it because the promoters don’t care about the share price stability? Or is it because they wish to raise large capital, flee with it, and leave the public shareholders hanging high and dry?
However, the worst feeling to come out of this is the realization that these institutions fail to apply the knowledge of basic economics into their equation. Issuing rights shares is a bad idea, and it will eventually result in a decline in share prices of the institution that issues such shares. How? Well, let’s look at the first thing that every introductory Economics course teaches us about demand and supply.
The theory of demand and supply states that price of a share is determined by how much shares are available in the market and how much demand is for those shares. Initially, the supply of shares is given by S1 and demand is given by D1. The market price and total quantity traded is determined at the point where suppliers and buyers agree on the price and quantity of the shares to be traded. Demand and supply of shares become equal at point E1. Therefore, the total shares bought and sold in the market is q1, and the price paid and received for each share is p1. This is what introductory Economics teaches us about market price and quantity determination of any product, whether it is a packet of Wai-Wai noodles or a share of a bank.
When financial institutions issue rights shares, there occurs an increase in the total number of shares available for trade in the market. This causes the supply of shares to shift from S1 to S2. Since demand is still D1, a new equilibrium is created at E2 where total number of shares traded is q2, and the price of a share is p2. Therefore, when supply of shares increases in the market, the price that each share fetches decreases. It does not matter whether all the rights shares that were announced get sold or not. The basic economic theory suggests that the mere existence of an increased supply of shares will drive the price of a unit of share downwards.
Now, those in charge of managing the financial institutions might argue that all is not bad with a lower price if they can generate a large amount of capital. However, they should realize that raising large amount of cash is not their only job. They are responsible for austerity and fiscal stability of their institutions in the long run. A decline in their share prices helps neither their austerity nor the long run fiscal stability.
Also, there is another half to this story that makes the situation even worse. Psychologists have studied human behavior for years, and have concluded that when it comes to handling stress from risks and confrontations, humans have two natural instincts: fight or flight. They have observed that very few fight, and that most choose to flee. This fleeing-from-danger element of human psyche causes a cascading effect in the market price when the rights shares are announced.
Once the price of a share falls from p1 to p2, the general public, that owns the shares of that institution, starts panicking. The dominant natural instinct of “flight” kicks in. Realizing that the price of a unit of share has fallen, the shareholders sell their shares to avoid incurring any more losses on their investment due to any further decline in share prices. Thus, a perfectly logical human reaction results in a lower demand for shares of this institution. The demand curve shifts from D1 to D2. And, a new equilibrium occurs at E3 where q1 number of shares is traded at a price p3.
So, the number of shares traded in the market, which is q1, is the same as before the announcement of rights shares. However, the new price p3, which a unit of share now fetches, is much lower than the initial price of share, p1. And, this is why issuing rights shares is a bad idea. The financial institutions are not doing anyone any favors by pursuing this approach of capital generation. It hurts the shareholders, it hurts the financial institutions themselves, and it hurts the overall financial market of Nepal. Last decade’s data of share market prices of financial institutions before and after the announcement of rights shares shows the pattern repeating itself again and again.
This opinion piece was published in The Republica daily on May 1, 2011.
Labels: banks, financial institutions, rights shares, share market
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