Kathmandu: The government has announced a 21-point plan to improve Nepal’s capital market. The plan covers changes to IPO rules, the restructuring of the Nepal Stock Exchange (NEPSE), new investment instruments, greater participation by institutional investors and changes to the tax system for share transactions.
The Ministry of Finance has made the plan public under the title “Capital Market Strengthening and Revival Action Plan, 2083.” It includes measures for both the primary and secondary markets.
New rules for IPOs
Under the plan, the Securities Board of Nepal (SEBON) will issue guidelines setting general eligibility requirements for companies seeking to issue IPOs.
Separate requirements will be developed for hydropower, manufacturing and processing, hotels and tourism, agriculture and pharmaceutical companies.
The rules will cover issues such as company eligibility, share pricing, price discovery and share allocation. SEBON is expected to complete the necessary policy and legal changes by the end of Poush 2083.
Listed companies can buy back and split shares
The government plans to introduce rules that will allow listed companies to buy back their own shares and split their shares.
Under Point 11 of the plan, companies will be able to buy back their shares using retained earnings that can be distributed as dividends, subject to the provisions in their memorandum and articles of association.
Companies will also be allowed to consolidate or split their share capital.
SEBON will consult with concerned parties and prepare the required rules, guidelines and other arrangements by the end of Magh 2083.
A share buyback reduces the number of shares available in the market and can increase a company’s earnings per share. A share split reduces the price of each share, which can make expensive shares more affordable for small investors.
Share-trading losses could be adjusted against gains
The government plans to review how profits and losses from share trading are calculated.
Under the proposed system, a loss from the sale of listed securities could be adjusted against gains from other listed-securities transactions made in the same income year.
The government plans to study the issue and improve the capital-gains tax calculation system so that gains and losses can be adjusted through the trading and settlement system. Tax would then be charged on the net gain.
Lower tax for long-term investors
The plan proposes a lower capital-gains tax rate for investors who hold shares for more than one year.
For resident individual investors, gains from listed securities held for more than 365 days will be taxed at 3.75 percent. Gains from securities held for 365 days or less will be taxed at 5 percent.
The government says the lower rate for longer-term holdings is intended to encourage investors to keep shares for a longer period rather than focus mainly on short-term trading.
NEPSE to be restructured
The government will also begin restructuring the Nepal Stock Exchange (NEPSE).
The process will be based on a report submitted by a government-appointed task force on Poush 25, 2082.
The existing NEPSE index will continue as an All Equity Index. A separate Benchmark Index will also be introduced.
The new index will take into account factors such as the number of tradable shares, market capitalization, a company’s financial condition, trading liquidity, corporate governance and the quality of information provided by companies.
The government has set a target of bringing the new index into operation by the end of Mangsir 2083.
NRNs to be allowed to trade in the secondary market
The government plans to make it possible for Non-Resident Nepalis (NRNs) to participate in Nepal’s secondary securities market.
To make this possible, proposed amendments to the Foreign Investment and Technology Transfer Act, 2075 and the Foreign Exchange (Regulation) Act, 2019 will be submitted to the Cabinet by the end of Asoj 2083.
Corporate bond market to be expanded
The government wants to expand the corporate bond market and reduce the financial system’s heavy reliance on bank loans.
SEBON will revise the existing rules related to bonds and put the changes into effect by the end of Asoj 2083.
The government will also encourage companies to issue different types of bonds, including green bonds, disaster bonds, social bonds, project-specific bonds and environmental bonds.
A separate policy will be prepared on how money raised through such bonds should be used and how information about its use should be provided to investors.
The government also plans to review trading fees for Treasury bills and development bonds to encourage more activity in their secondary market.
Margin trading and short selling
The government plans to amend the Securities Act, 2063 to provide a legal basis for margin lending, intraday trading, securities lending and borrowing, and short selling.
These changes would give investors more options when buying and selling securities.
The government also plans to approve regulations related to bonds, margin lending and intraday trading by the end of Asoj 2083.
Brokerage companies to be strengthened
SEBON will introduce a policy to improve and strengthen securities brokerage businesses.
The aim is to make brokerage companies more modern, technology-based and capable of providing a wider range of securities-related services.
The government also plans to amend the law to improve the investigation of securities-related offenses.
More institutional investment in the capital market
The government plans to increase investment by institutional investors in both the primary and secondary markets.
Institutions such as the Employees Provident Fund, Citizen Investment Trust, Social Security Fund, insurance companies and mutual funds will be encouraged to invest more in securities instead of keeping a large part of their funds in bank deposits.
The government will make the necessary legal, policy and infrastructure changes to support this.
Bank investment limits to be reviewed
The government will review the rules governing investments by banks and financial institutions in the capital market.
SEBON and Nepal Rastra Bank will jointly review existing limits, risk weights and collateral requirements. They will also consider issues such as market exposure, liquidity, returns, systemic risk and the protection of depositors.
The review is expected to be completed by the end of Kartik 2083.
Nepal Rastra Bank will also require banks and financial institutions to set investment policies with a minimum 45-day holding period for investments in the secondary market. The measure is intended to reduce short-term speculative trading.
Private equity and venture capital
The government also plans to improve the rules governing private equity (PE) and venture capital (VC).
The changes are intended to make it easier for startups, innovative businesses, technology companies and small and medium-sized businesses with high growth potential to raise funds.
SEBON will study international practices and consult with stakeholders before preparing rules covering investment, capital raising, returns, withdrawal of capital and exit arrangements.
The necessary legal and market infrastructure is expected to be prepared by the end of Poush 2083.
CDS and Clearing to be strengthened
The government plans to strengthen the institutional capacity of CDS and Clearing Limited, which operates Nepal’s central securities depository system.
It will also study possible structural changes to the company. The study is expected to be completed by the end of Falgun 2083.
The move is intended to support the development of new securities services and improve the country’s clearing and settlement system.
New financial instruments
The government plans to develop new financial instruments, including bonds, money-market instruments and exchange-traded funds (ETFs).
It also plans to make mutual funds more transparent, diversified and technology-friendly so they can play a bigger role in long-term investment.
Full 21-point plan
The government’s action plan includes the following measures:
1- IPO rules: SEBON will issue general IPO eligibility guidelines and develop separate requirements for hydropower, manufacturing and processing, hotel and tourism, agriculture and pharmaceutical companies.
2- New financial instruments: Mutual funds will be developed as a long-term investment option. Rules and infrastructure for bonds, money-market instruments and ETFs will also be developed.
3- Brokerage reform: SEBON will introduce a policy to strengthen and modernize securities brokerage companies.
4- New trading options: The Securities Act will be amended to provide a legal basis for margin lending, intraday trading, securities lending and borrowing, and short selling.
5- NEPSE restructuring: NEPSE will be restructured based on the report submitted by the government-appointed task force.
6- New benchmark index: The current NEPSE index will remain an All Equity Index, while a new benchmark index will be introduced using factors such as market capitalization, liquidity, financial condition, corporate governance and information disclosure.
7- NRN participation: Legal changes will be proposed to allow NRNs to participate in Nepal’s secondary securities market.
8- Corporate bonds: The government will work to expand the corporate bond market and encourage financing through the market instead of relying mainly on bank loans.
9- Specialized bonds: Green, disaster, social, project-specific and environmental bonds will be encouraged.
10- Government securities: Trading fees for Treasury bills and development bonds will be reviewed to encourage secondary-market trading.
11- Share buybacks and splits: SEBON will prepare the necessary rules and infrastructure to allow listed companies to buy back and split their shares.
12- Trading regulations: Regulations covering bonds, margin lending and intraday trading will be approved and implemented.
13- Margin lending: Investors will be able to borrow money through licensed securities brokers under the margin lending rules.
14- Securities offenses: The Securities Act will be amended to strengthen SEBON’s role in investigating securities-related offenses. The law will also include provisions allowing private companies to issue bonds.
15- Institutional investors: Measures will be introduced to increase institutional participation in both primary and secondary markets.
16- Portfolio diversification: Employees Provident Fund, Citizen Investment Trust, Social Security Fund, insurance companies and mutual funds will be encouraged and facilitated to invest in securities.
17- CDS and Clearing: The capacity and structure of CDS and Clearing Limited will be reviewed and strengthened.
18- Private equity and venture capital: A risk-based regulatory framework will be developed to make investment and exit processes easier and more transparent.
19- Bank investment rules: SEBON and Nepal Rastra Bank will jointly review the investment limits, risk weights and collateral requirements for banks and financial institutions investing in the capital market.
20- Capital-gains tax: Gains on listed securities held for more than 365 days will be taxed at 3.75 percent for resident individuals, while gains on securities held for 365 days or less will be taxed at 5 percent. The government will also study a system for adjusting losses against gains from listed-securities transactions in the same income year.
21- 45-day holding period: Nepal Rastra Bank will require banks and financial institutions to set investment policies with a minimum 45-day holding period for secondary-market investments to reduce speculative risk.
Implementation will determine the outcome
The 21-point plan covers several areas of Nepal’s capital market, including IPOs, share taxation, NEPSE, brokerage services, corporate bonds and institutional investment.
Some of the proposed changes, particularly share buybacks, share splits and the adjustment of trading losses against gains, could directly affect investors if they are put into practice.
The government has introduced the plan at a time when Nepal’s economy has been facing slower activity in the banking and financial sectors, industries, trade, infrastructure, investment and the capital market. The government has also cited the severe flood in the Bhotekoshi River on Bhadra 10, 2083, which damaged hydropower projects and other infrastructure and added pressure to the economy.
However, announcing the plan is only the first step. Its impact will depend on how quickly the required laws, regulations, systems and market infrastructure are prepared and implemented.
If the measures are carried out as planned, they could give investors more choices, improve the functioning of the market and encourage greater long-term investment.
