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Why the huge price gap between ordinary & promoter shares of NABIL and NIB when both are easily tradable?

- ShareSansar, August 10, 2017  on Exclusive , Featured , Latest , Stock Market
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Unlike the promoter shares of other listed companies, Nabil Bank and Nepal Investment Bank promoter shares are freely tradable and lucrative as its ordinary shares. But there is a significant gap between the prices of the both stock (ordinary and promoter shares) in Nepal Stock Exchange.

The last traded price of the ordinary shares of Nabil Bank Limited is Rs 1768 and Nabil promoter is Rs 1282 whereas the price of the ordinary shares of Nepal Investment Bank is Rs 770 and its promoter shares is traded at Rs 683. But why there is so much difference since both ordinary and promoter are easily tradable in NEPSE?

It is basically about investor’s perception of the promoter shares. Some investors opined that there is no reason as to why Nabil promoter share should be priced below the ordinary one.  Since Nabil promoter share is freely tradable. Even the returns are the same then why there is differences in price? Investors are gradually realizing this, and the price difference is getting narrower over the time.

Price of Nabil, NabilP and NIB, NIBPO at different Time Interval
DateNabil NabilPDiff (%)NIBNIBPODiff (%)
Jan, 20131580104950.62%387 
Jan, 20142050130057.69%754 
Jan, 20152012136547.40%78150754.04%
Jan, 20161890144530.80%82572613.64%
Jan, 20171390100039.00%65556416.13%
Aug, 20171768128237.91%77068312.74%

 

 

The price of Nabil Promoter and NIB Promoter has definitely come a long way. Initially there was a difference of more than 50 percent between Nabil and NIB ordinary and promoter. But now the difference percentage is narrowed. Seems more the investors are aware about the free tradability features of Nabil and NIB promoter share more they are attracted towards this resulting the narrowed gap. And we all know that both shares offer same returns in terms of dividend and other rights.

Who are promoters and why there is difference in price of ordinary and promoter shares in NEPSE?

Promoters are the initial group of investors who established the company, raise funds and take the bigger chunk of risk. Once they invest and established the company, they may require more funds and therefore opt to request the general public to invest in their company. If the public finds attractive prospects in the company, they will invest in the company through IPO. In case of Bank and Financial Institutions (BFIs) it is compulsory to issue minimum 30% shares to the general public.

There is absolutely no difference in returns and both have equal claim on the net profit.  However, everyone must have noticed promoter shares trade much below than ordinary shares. This is because of various restrictions imposed upon promoters. They cannot sell their promoters share directly on secondary market. These hassles make the shares comparatively less liquid, meaning they aren’t as easily salable as ordinary shares. Therefore, there is difference in price. However, it is to be noted that there is no standard formula for calculation of promoter share prices based on ordinary share prices (except the first time it is listed). It is simply the result of demand and supply. Usually BFI’s promoters shares are traded 50% less of their ordinary price.

Why there is hassle related to Promoter shares?

  • The first hassle is that NRB requires BFI promoter shares be listed at not more than 50% of price of ordinary share.
  • Clearance letter from Credit Information Bureau (CIB report) to confirm that the buyer is not blacklisted.
  • Seller must first offer their promoter share to existing promoter with minimum 35 days pre-notice.
  • Transactions of promoter shares must pass through scrutiny of NRB.
  • Buyer needs to disclose source of funds.
  • Promoter shares are directly not tradable making it illiquid assets.

Due to above hassles most of investors are not attracted towards promoters share and its obvious their price is traded lower than ordinary in the Nepal Stock Exchange.

Why Nabil and Nepal Investment Bank promoter shares are different from other banks promoter share?

Initially at the time of inception, NIDC Development Bank Limited (NIDC) and Rastriya Banijya Bank Limited (RBB) have 15% promoter shares each on Nabil Bank Limited and Nepal Investment Bank Limited respectively. Later, Nepal Rastra Bank (NRB) has instructed all the BFI’s having shares of others BFI’s (cross holding shares) to offload all the shares within some time frame. Since NIDC and RBB have huge promoter share of Nabil and RBB and this share are non-tradable at NESPE. They are not able to sell this share since people are not attracted to this promoter shares.

Later, NRB has made separate provision which stated that these promoter shares of Nabil and NIB held by NIDC and NIB respectively are easily tradable and the buyer must make self declaration that they are not blacklisted by the Credit Information Bureau to buy such scrip.

Once NRB has made clarity about tradability of these shares, NIDC and RBB are able to sell this huge promoter share of Nabil and NIB on auction to general public and institutions and it’s started trading on NEPSE on promoter share heading on regular basis.

What rational and smart investors should do?

If we look at the price gap between Nabil and NIB ordinary and promoter share we realize that it has been in fact getting somewhat narrowed over the recent years, despite the fact that the bank has equally rewarding both kinds of shareholders.

Lately most of the institutions and mutual funds are investing on Nabil and NIB promoter share than in their ordinary share.

Hence, the smart and rational investor must prefer Nabil Promoter and NIB Promoter over ordinary since it is better than NABIL and NIB ordinary share, and even best if we look at the price difference.

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