Parliamentary Committee Takes Bold Measures to Address Irregularities in IPO Premiums, Lock-in Periods, and Transparency in Stock Market

In the parliamentary committee meeting yesterday, it was observed that many life insurance companies were issuing IPO shares at the premium price per share from regular investors, above the standard value. Earlier, allegations of improper premium approvals by regulatory authorities led to an investigation, uncovering possible misconduct and misuse of authority by key figures. Here are the instructions the committee provides after discussing with officials from relevant authorities (excluding absentees):

1) The absence of Mr. Ramesh Kumar Hamal, Chairman of the Securities Board of Nepal in yesterday's meeting, without prior notice, drew serious attention. Additionally, the committee instructs the Commission for Investigation of Abuse Of Authority to expeditiously investigate the financial transactions and questionable practices of the Chairman within 30 days, especially granting permissions for various companies to bring their initial public offerings (IPOs) at inflated and non-transparent premium prices.

2) The committee identified a lack of transparency in the publication of regulations governing the issuance of shares by companies. To address this, immediate steps were outlined, including the publication of regulations, amendments to be published in the Nepal Gazette, and measures to prevent undue influence on investors.

3) In response to a growing trend of companies issuing Initial Public Offerings (IPOs) at premium prices, the parliamentary committee has directed the Securities Board of Nepal (SEBON) to adopt the best practice of the Book Building process. The committee expressed concern that some companies, despite SEBON's rule amendments allowing increase in valuation through revaluation for IPOs, continue to issue shares at a premium.

To mitigate risks to general investors, the committee specifically instructs SEBON not to permit companies with a Real Net Worth exceeding 90 after revaluation to issue IPOs. This directive aims to ensure that companies, by increasing their valuation through revaluation, do not pose excessive risks to investors in the process of selling shares at premium prices. The emphasis on adopting the Book Building process is intended to enhance transparency and fairness in determining IPO prices.

4) In the recent changes to the Insurance Act of 2079, there's a rule (in the fourth amendment, Section 45) that says when insurance companies want the general public to buy shares, they have to ask for a certain percentage of the share's quoted price. This rule is causing a problem because, according to the Banking and Financial Institutions Act, insurance companies can't sell shares at a higher price than normal, especially when they've already set aside 30 percent of shares for the general public. This conflicts with the Insurance Act and isn't good for regular investors. So, the committee is telling the Nepal Insurance Authority to fix this rule right away to make sure it follows the Insurance Act properly and protects the interests of regular investors.

5) The Company Registrar's job is to register and keep records of companies. However, other organizations, like Nepal Rastra Bank for banks, the Electricity Regulatory Commission for electricity companies, and the Nepal Insurance Authority for insurance companies, are responsible for regulating those specific types of companies. The committee thinks that if the Company Registrar needs more regulation or if a new organization should be created to oversee it, the government should make a new law about it. They want the government to register this new law in the Federal Parliament.

6) Recognizing challenges with the existing three-year lock-in period for promoter shareholders and project-affected locals in hydropower projects, the parliamentary committee directs the Securities Board of Nepal (SEBON) to intervene strategically. In cases where projects face delays, fail to generate profits, and investors struggle to recover their investments within the lock-in period due to the immediate sale of shares by promoters as soon as the lock-in period ends in hydropower projects, the parliamentary committee directs the SEBON to take measures to manage at least one-third of the shares held by promoters. This directive aims to mitigate the risk of share sales by promoters immediately after the expiration of the lock-in period, thereby ensuring sustained project continuity and protecting investor interests.

7) The committee urged the Ministry of Finance, the Securities Board of Nepal, and the Nepal Insurance Authority to legally regulate and expand the scope of the Nepalese stock market, including instruments like debenture, bonds, and green bonds. This expansion aims to enable non-resident Nepalese to participate in the stock market and make investments. The directive emphasizes the need for clear legal provisions to facilitate the involvement of non-resident Nepalese in securities trading and related activities.

8) Large companies, especially those with more than Rs. 5 Arba in the capital, haven't followed the government's decision to become public companies, the committee is telling the Ministry of Finance, the Company Registrar's Office, and the Securities Board of Nepal to start the required process within a year and make the necessary changes as soon as possible.

9) The committee is looking into whether various companies, that issued premium shares in the past three years, were reasonable in setting the premium prices or if they did something illegal. If they find any wrongdoing, the responsible officials will face legal action. The committee instructs the Commission for Investigation of Abuse Of Authority to take appropriate legal steps and provide progress details to the committee within 30 days. 

10) Many people, especially those with low insurance literacy, are not regularly paying their life insurance premiums. In such cases, they end up surrendering their policies, and the government doesn't receive any benefit from the surrendered amount. Also, the rights of the insured individuals are not protected. To address this, the committee suggests imposing a minimal handling fee (not exceeding 25%) on the remaining amount after the surrender, and this fee should be collected from the insured individuals within three months. The committee directs the information to be submitted to the committee within three months through the Nepal Insurance Authority.

11) The committee announced that the next meeting would be scheduled after receiving pertinent information on the outlined directives.