The investment environment in Nepal has not been stable since a decade and comprises many unforeseeable risks associated with policy, political and regulatory instability, operating environment, macro dynamics etc. The skeptic financial performance and health of companies, operating with higher degree of business uncertainties, which could consequently affect their repayment capacities, could be the triggering factor for companies opting common equity over bonds or debentures. Considering such a volatile and rickety external operating environment, it is very difficult for companies to project their cash flows for a particular fiscal year. Thus, though they, i.e., the entities endeavor to generate profitability and eventually aspire to distribute dividends, due to volatile externalities, companies could have been tended towards stock, which doesn’t enforce them for yearly obligatory payments in return for the collected capital funds.

If we look at obligations or liabilities that companies bears towards common stock holders, in terms of liabilities, the dividend payment is not mandatory and solely depends on profitability and company’s dividend policies. Furthermore, as companies are not duty-bound for dividend payments and neither is cumulative, common equity could have been the most preferred capital structure tool. Now, under such scenario, who is to be blamed? Is it the Regulators for not streamlining mandatory benchmarks or proportion for capital instruments, the government, for not being able to provide an attractive and trusted investment environment or the stakeholders, pouring money without rigorous risk-return assessment?

Minutely dissecting, the payouts of many corporations, on an average, have been mostly below the ongoing market interest rate on time deposits or even savings in some stances. Under such scenario, where the cost of stocks for companies is relatively on lower end compared to cost of issuing bonds, which would cost on average more than that of raising common equity, obviously, every company would opt equity over bonds. In addition, the cash flows, i.e., annual agreed coupon payments on bonds are mandatory and legally enforceable in line with indentures. Beyond, legal complexities, lack of corporate expertise on bonds/debentures, legal framework, level of market awareness concerning bonds, propensity and attraction of investors, liquidity of securities, capital appreciation issues etc., could be other directly related factors, motivating or enforcing companies to choose stocks over bonds or debentures.