Regulatory Framework for Promotor Shares in Nepal
In Nepal, the provision for promotor shares of banks, financial institutions, and insurance companies is subject to regulatory requirements. Banks and financial institutions must issue at least 30% of the total shares to the public.
If promotor shares are to be converted into ordinary shares, approval from the regulatory authority and a resolution passed in the general meeting are required. A maximum of 49% of the shares can be converted into ordinary shares. Similarly, insurance companies follow the same rule, requiring at least 30% of shares to be issued to the public while retaining a minimum of 51% promotor shares, with the remaining 49% convertible into ordinary shares.
For hydropower companies, the share allocation ranges from a minimum of 15% to a maximum of 49% for the public. These companies are subject to a three-year lock-in period post-IPO listing, during which promotors cannot sell their shares. After three years, promotor shares can be traded like ordinary shares. However, the Electricity Regulatory Commission is drafting additional guidelines to regulate promotor shares in the hydropower sector.
Practices and Concerns in Nepal’s Share Market
Many hydropower companies tend to issue rights shares and announce significant bonus shares near the end of their lock-in period to inflate share prices. This allows Promotor shareholders to exit at a profit. This practice has raised concerns as it makes it difficult to identify the actual Promotors of the company post-lock-in period.
For companies without clear regulatory frameworks, such as cement, hotel, and real estate companies, the percentage of shares offered to the public varies. The Securities Board of Nepal (SEBON) once approved a rule allowing companies in certain sectors to issue only 10% of their total capital to the public. For instance, Shivam Cement issued just 12% of its capital as public shares, as did Chandragiri Hills and City Hotels.
Under current regulations, promotor shareholders can only sell their shares three years after allocation. Shivam Cement, for example, has seen a sharp decline in its share price as promotors began selling after the lock-in period. The share price dropped from NPR 1,900 to below NPR 450. Similarly, Himalayan Distillery, which distributed high dividends for several years, has experienced declining share prices as promotor shares entered the market. The company’s share price, which once reached NPR 7,500 per share, now trades below NPR 2,000.
Although banks and financial institutions have clear rules for promotor shares, there is ambiguity for other sectors, especially after the lock-in period. This uncertainty has led to a trend where promotors exit the market after the lock-in period, raising concerns among investors. Stakeholders are now urging SEBON to address these issues to protect the stability of Nepal’s capital market.
Promotor Share Policies in India
In India, the Securities and Exchange Board of India (SEBI) is reviewing the concept of “Promotor” shares, proposing a shift toward the “person in control” framework. SEBI argues that the traditional definition of promotors no longer fits modern businesses, where venture capitalists and private equity players often control decision-making.
Under India’s Companies Act, 2013, promotors are defined as direct or indirect shareholders or directors with control over the company. SEBI’s Issue of Capital and Disclosure Requirements (ICDR) Regulations, 2009 mandates a three-year lock-in period for promotor shares if they hold more than 20% of the shares post-IPO. However, SEBI has recently reduced the lock-in period to 18 months to align with the changing investment landscape.
The shift to the “person in control” framework reflects the growing role of institutional investors in India’s capital market. For instance, institutional investors owned 34% of the shares in India’s top 500 companies in 2018, up from 14% in 2001. This change aims to enhance accountability and transparency, ensuring the rights of minority shareholders are protected.
Minimum Public Shareholding (MPS) in India
India requires publicly listed companies to maintain a minimum of 25% public shareholding, as per the Minimum Public Shareholding (MPS) rule introduced in 2010. Companies with over 75% promotor ownership must reduce their holdings to comply. In 2019, the government proposed raising the MPS threshold to 35%, but this was rolled back following significant market opposition.
Conclusion
While Nepal’s regulatory framework for Promotor shares varies across industries, the growing trend of promotors exiting the market after the lock-in period has raised concerns. Comparatively, India has made strides in redefining promotor concepts and ensuring transparency through institutional investor participation. Nepal could benefit from adopting similar measures to strengthen its capital market and safeguard the interests of public investors.