10-Points Directive of the Audit Committee on Insurance, Hydropower and Public Companies

Kathmandu : The Public Audit Committee of the Parliament has discussed the issue of shares issued by insurance companies at a premium price, the issue of capital market and insurance.

After receiving a complaint that the insurance company was allowed to issue an IPO at a premium against the law, the Audit Committee discussed the matter with the Securities Board of Nepal (SEBON), the Insurance Authority and the Company Registrar’s Office.

Committee’s 10-point directive are as follows:

1.The committee has drawn serious attention to the fact  that Mr. Ramesh Kumar Hamal, Chairman of the Securities Board of Nepal, who was invited to discuss  agenda of the committee on 28th of December, 2023 A.D, was absent from the committee without notice and without information. Non-accountability to the parliamentary committee is non-accountability and insult to the public. This meeting of the committee expresses its regret for the absence of the chairman of the SEBON, an organization that protects the interests of ordinary investors, and expresses doubt that such non-accountability of the chairman of SEBON may lead to absence of public responsibility from him in the future. Also, there is widespread public complaint that the chairman of the SEBON acted irresponsibly by allowing various companies to issue primary shares at a premium price in an unintended and opaque manner through economic manipulation.

And since the matter has been raised in the committee, this meeting of the committee directs the money laundering investigation department to investigate his assets quickly and to provide the related work progress report to the committee within 30 days.

2.The Securities Board of Nepal shall base the issue of shares of companies on the basis of the Securities Act, 2063 B.S. Similary, the following regulations and other rules, regulations, guidelines issued for the implementation of the said Act and the instructions issued by the board and the consent and approval provided by the direct regulatory body of the company issuing the shares should me under the same act of 2063 B.S.

Although it appears that the following regulations have been made under the authority delegated in the Securities Act, 2063 B.S:–Nepal Securities Board Regulations, 2064 B.S–Securities Market Conduct Regulations, 2064 B.S–Securities Dealers (Securities Brokers and Securities Dealers) Regulations, 2064 B.S–Securities Practitioners (Merchant Bankers) Regulations, 2064 B.S–Collective Investment Funds Regulations, 2067 B.S. Central Depository Services of Securities Regulations, 2067 B.S–Credit Rating Regulations, 2068 B.S–Securities Registration and Issuance Regulations, 2073 B.S–Regulations on Commodity Exchange Market, 2074 B.S–Securities Listing and Transaction Regulations, 2075 B.S Specialized Investment Fund Regulations, 2075 B.S etc. are not published in the Nepal Gazette.

Similarly, the company registrar’s office has no information about why, when and how the rules and procedures of the Securities Board of Nepal have changed is not mentioned in the letter no.80 and 81; roll no.908 as per letter dated 2080-07-22 B.S. In such a situation, it was not possible to say that other ordinary investors are aware of the amendments in the mentioned laws. Such laws that manage the overall share trading are not provided to the general public in a legal manner, so there is room for doubt about transparency. It is natural to question the functioning of the regulatory body with practices such as reducing the time period for issuing shares at a premium price from 3 years to 2 years, and not having a detailed discussion with the stakeholders while revising the provisions of the regulations. It should be ensured that the Securities Board, which aims to protect the rights and interests of investors, create a clean and transparent market and reduce systemic risk, cannot be affected by the influence and pressure of certain interest groups.

The Ministry of Finance should also be alert in this regard. To expand Nepal’s capital market and commodity exchange market in a timely manner, to make it transparent, to publish the mentioned regulations made according to the delegated management as soon as possible in the Nepal Gazette. In order to amend the provisions of the regulations, to reach a conclusion only after a detailed study and discussion with all stakeholders.

To ensure that ordinary investors cannot be affected by the influence and pressure of certain interest groups,

Similarly, in order to expand Nepal’s capital market and commodity exchange market in a timely manner, to make it transparent, and to improve the securities law in accordance with international practice, and to improve the structure of the Securities Board, after detailed discussion with the stakeholders, the related bill should be registered in the federal parliament.

Similarly, it seems necessary to identify and immediately control the act of profiteering through the loopholes of the existing laws related to the stock market, while the law related to trustees seems to be lacking. There is also a lack of laws related to trading, membership, insider trade, investor education and security, disclosure rules, and banning illegal and criminal trading practices in the securities market. This meeting of the committee instructs the Government of Nepal, the Ministry of Finance and the Securities Board of Nepal to register the related bill in the Federal Parliament, prioritizing the creation of such urgent laws.

3.It seems that most of the companies have given preference to the process of issuing primary shares at a premium price recently. The impact of which is also seen in the secondary stock market.

It seems that discretionary rights are used when issuing primary shares (IPO) at a premium, while in recent times the book building process, which is determined by the competition of investors in the market, seems to be an international practice. Similarly, now the Securities Board of Nepal has amended the rules and made it possible to calculate the net worth for the purpose of issuing IPO shares by increasing the price of the company even though the company is in the state of liquidation after revising the rules.

It seems that the company that is going to liquidation has started issuing primary shares (IPO) by raising the valuation and increasing the price after making it possible to calculate it in Net Worth for the purpose of issuing primary shares (IPO) through revaluation. Therefore, this meeting of the committee is to adopt the book building process in which the price will be determined by the competition of investors and to allow the primary shares to be issued only to companies with a “Real Net Worth” of more than 90 without revaluation (otherwise, loss-making companies will be re-evaluated).

Because of selling shares by increasing the price will lead ordinary investors may be exposed to excessive risk due to which it instructs the Securities Board of Nepal to carry out the work in such a way as not to allow such a situation mentioned above to occur.

4. In subsection 950 of Section 45 of the Insurance Act, 2079, there is a provision that “regardless of what is written in the current law, the insurer must demand 100 percent of the face value of the shares when calling for applications from the general public.”  And because the insurance companies reserved 30 percent of shares for the general public at the time of establishment, it does not seem possible to allow or approve the issuance of shares at more than the face value (premium price) (which is being applied to banks and financial institutions according to the Act on Banks and Financial Institutions). This meeting of the committee instructs the Nepal Insurance Authority to immediately correct the action as it is against the Insurance Act and against the interests of the general investors to allow the Nepal Insurance Authority to sell shares at a premium to insurance companies.

5. Since the office of the company registrar is only responsible for registering the company and keeping its records, in the case of banks, Central Bank, in the case of hydropower companies, Nepal Electricity Regulatory Commission, and in the case of insurance companies, the Nepal Insurance Authority, should be given to the office of the company registrar to regulate other companies or by forming any other body. Because it looks like performance has to be done and since a law is required for that, this meeting of the committee also instructs the government of Nepal to register the related bill in the federal parliament as soon as possible.6.

Although a lock-in period of three years has been kept for basic investors who invest in projects such as hydroelectricity, the construction of such projects has not been completed and since the basic investors are selling their shares after the lock-in period ends without giving profit, it is seen that the construction of the project is affected as well as it is not giving returns, so this meeting of the committee instructs the Nepal Securities Board to manage in such a way that at least one-third of the shares of the basic investors will be maintained until the loan taken during the establishment of the project is repaid.

6.In order to expand the scope of the securities market, this meeting of the committee directs the Ministry of Finance, the Nepal Securities Board to conduct legal management of transactions including other securities instruments (including loans, bonds and green bonds) and to allow non-resident Nepalese to invest in the securities market.

7.Since the policy decision of the Government of Nepal that large companies or companies with a capital of more than 5 billion should be converted into public companies has not been implemented, this meeting of the committee instructs the Ministry of Finance, the Office of the Registrar of Companies and the Nepal Securities Board to implement the said decision within one year.

9. Prior to this, various regulations have been changed unstable and shares are bought and sold at a premium price on purpose, so that the premium shares issued by various companies that issued shares at a premium price within the last 3 years were justified and illegal or not and if found guilty during the investigation, this meeting of the committee instructs the Commission for Investigation of Abuse of Authority to take the relevant officials to the process of action according to the law and to provide the related work progress details to the committee within 30 days.

10. In the context of low insurance literacy, if life insurance common people are unable to pay the insurance premium regularly, they are unable to get the surrender value even if they leave the insurance and it seems that such a number is high.

Since the state is not getting any benefit from the amount of surrender insurance and the rights and interests of the insured are not being protected, if it is not regularized within the first three years, considering the interests of the surrendered insured, taking a low operating fee (not to exceed 25 percent), the remaining amount will be deposited in the account of the insured within three months as a surrender value. This meeting of the committee instructs the Nepal Insurance Authority to inform the committee.