Securities Laws for Hydropower in Nepal

Posted by Parajuli Sushil 2 months Ago Add Comment 54 Min Read

I started to write this post expecting there are many relevant securrities laws that are sector specific to hydropower – but seems there aren’t that many – so it eventually and unintentionally became a general introduction to the securities laws of Nepal. 

See my notebook link here: Notebook Link 

This initial phase involves understanding the primary legislation that establishes the fundamental principles and regulatory structure of Nepal’s capital market. This law is the cornerstone for all subsequent securities-related activities.
For any company established in Nepal that contemplates fundraising through the issuance of securities, the process is governed from the outset by the following key legislation.

Order

Document Name (English)

Primary Trigger Event

1

Securities Act, 2063

Company establishment & decision to raise public funds.

1. The Securities Act, 2063: The Primary Legislation

The Securities Act, 2063 serves as the principal statute governing Nepal’s capital market. Its overarching objectives are to facilitate capital formation for economic development, systematize the securities market, and ensure investor protection. This Act provides the legal foundation for all entities participating in the market.

Scope and Key Provisions:

The Act establishes a comprehensive regulatory framework with several critical components for a prospective issuer of securities.

  • Establishment of the Regulator: The Act constitutes the Nepal Securities Board (SEBON) as the autonomous regulatory authority. SEBON is vested with the full power to regulate, monitor, and oversee all capital market activities, including the licensing of market intermediaries and the supervision of issuers.
  • Mandatory Requirements for Issuers: The Act sets forth mandatory procedures that companies must follow:
    • Securities Registration: An organized institution must register its securities with SEBON prior to any public offering.
    • Public Issuance Threshold: A public issuance becomes mandatory if securities are offered for sale to more than fifty individuals.
    • Prospectus Obligations: Any public issuance requires the publication of a prospectus approved by SEBON. This document must contain comprehensive and accurate information to enable potential investors to make an informed assessment of the company’s financial status and prospects. The Act imposes liability on the company, its directors, and contributing experts for any losses incurred by investors due to misrepresentations in the prospectus.
  • Ongoing Regulatory Oversight: SEBON’s authority extends beyond the initial issuance. The Act grants SEBON extensive powers, including the right to conduct inspections, issue necessary directives to ensure compliance, and intervene in market operations to protect investor interests, such as by suspending trading or requiring a company to call a general meeting.

Sector-Specific Note: The provisions of the Securities Act, 2063, are general and apply uniformly to all sectors. There are no specific clauses within this Act that uniquely regulate or differentiate companies based on their industry, such as hydropower. The obligations for registration, disclosure, and compliance are universal for all “organized institutions” seeking to issue securities.

Phase 2: Issuance Preparation - Pre-Issuance Regulatory Framework

This phase encompasses the detailed planning and procedural requirements a company must fulfill prior to launching a public offering. It involves critical steps such as credit assessment, formal registration, and establishing the technical infrastructure for application processing.
The following documents become relevant as a company moves from the decision to raise funds to the point of being ready to accept public applications.

Order

Document Name (English)

Primary Trigger Event

2

Credit Rating Regulation, 2068

Decision to pursue a public issuance.

3

Securities Registration and Issuance Regulations, 2073

Preparation of the application to SEBON.

4

Securities Purchase (Public Issuance) Directive, 2073

Planning the application collection process.

5

Securities Public Issuance Centralized Electronic Service Directive, 2074

Implementing the electronic ASBA system.

6

Book Building Directive, 2077

Optional: Choosing the book-building method.

7

Securities Issuance and Allotment Directive, 2074

Executing the public offering and allotment.

2. Credit Rating Regulation, 2068

This regulation establishes the framework for the credit rating industry in Nepal, ensuring that assessments of credit quality are conducted with professionalism and transparency. It is a mandatory prerequisite for most public issuances.

Scope and Key Provisions:

  • Mandatory Rating Requirement: An organized institution must obtain a credit rating prior to the public issuance of securities exceeding a value of three crore rupees. This requirement applies to shares, debentures, preference shares, and issuances involving a premium.
  • Prospectus Disclosure: The resulting credit rating must be prominently disclosed in the prospectus or other public offering documents.
  • Loan Facility Ratings: The regulation also permits ratings to be obtained for entities seeking loan facilities, and the central bank may mandate such ratings for certain borrowers.
  • Rating Process Integrity: Credit Rating Agencies (CRAs) must establish a Rating Committee for decision-making, base ratings on thorough financial and risk analysis, and continuously monitor ratings for at least three years. Issuers are obligated to cooperate fully with the CRA.

Sector-Specific Note: The credit rating requirement is a universal prerequisite for public issuances meeting the specified thresholds. There are no unique exemptions or additional criteria for specific sectors like hydropower. The rating process for a hydropower company would inherently consider project-specific risks, such as construction timelines and power purchase agreements, as part of the standard financial and management analysis.

3. Securities Registration and Issuance Regulations, 2073

These regulations provide the comprehensive procedural rulebook for registering securities with SEBON and conducting public offerings. They cover Initial Public Offerings (IPOs), Further Public Offerings (FPOs), right shares, and debentures.

Scope and Key Provisions:

  • Securities Registration: Companies must apply to SEBON to register their securities, submitting extensive documentation including audited financial statements and constitutional documents.
  • IPO Requirements: The size of an IPO, generally, must be between 10% and 49% of the issued capital. The company must have completed at least one fiscal year of audited operations.
  • Premium Issuance: Issuing securities at a price above their face value (a premium) is permitted only if the company has a record of profitability and a net worth per share exceeding the paid-up capital per share.
  • Book Building: The regulations set eligibility criteria for using the book-building method, which involves a higher net worth requirement and allocates a portion of shares to institutional investors.
  • Lock-in Periods: Securities held by promoters and other non-public groups are subject to a lock-in period, typically three years, preventing their immediate sale after the IPO.

 

Specific Provisions for the Hydropower Sector

The securities regulations include distinct provisions that address the unique financial and operational characteristics of capital-intensive, project-based industries such as hydropower development. These rules create a tailored framework for infrastructure projects that have long gestation periods, high upfront costs, and significant regulatory requirements.

  1. Mandatory Project Prerequisites for Public Issuance Before a hydropower company can proceed with a public offering to finance project development, it must demonstrate substantial project readiness through several key milestones:
  • Executed Power Purchase Agreement (PPA): The company must have a finalized PPA in place, providing evidence of a committed revenue stream for the future generated electricity.
  • Financial Closure: The project must have achieved financial closure, confirming that all necessary funding for project completion has been secured through a combination of equity and debt.
  • Full Promoter Contribution: Founders and promoters must have fully paid their entire committed share capital, ensuring significant skin in the game before inviting public investment.
  • Managed Debt Structure: The company must commit to maintaining a prescribed debt-to-equity ratio throughout the construction phase to mitigate financial risk for investors.
  1. Special Issuance Pathway for Government-Backed Projects Hydropower companies with majority ownership (at least 51%) by the Government of Nepal qualify for a specialized issuance pathway. This framework acknowledges the strategic importance of such projects while maintaining investor safeguards:
  • Modified Eligibility Criteria: These entities can issue shares under a government-approved program without meeting all standard profitability and operational history requirements that apply to typical IPOs.
  • Core Project Requirements Maintained: Despite relaxed financial criteria, essential project-specific conditions remain mandatory, including possession of a detailed project design report and the executed PPA.
  1. Phased Payment Mechanism for Investors Recognizing the extended construction timelines of hydropower projects, the regulations permit a flexible payment structure that aligns capital calls with project milestones:
  • Minimal Initial Investment: Investors may apply for shares by paying only 10% of the face value initially.
  • Milestone-Based Capital Calls: The remaining share price is payable only after two critical conditions are met: promoters have fully paid their committed capital, and the project has achieved at least 50% physical progress.
  • Construction Phase Cash Flow Management: This mechanism helps match capital requirements with project development phases, reducing financial pressure during construction.
  1. Environmental and Social Governance Mandates The regulations incorporate specific environmental and social compliance requirements particularly relevant to impactful sectors like hydropower:
  • Comprehensive Environmental Assessment: Hydropower companies must conduct a complete environmental study according to prevailing laws, with the full assessment report included in the public offering documents.
  • Local Community Investment Quota: Up to 10% of the public offering shares must be allocated to residents of the project-affected area, with eligibility determined based on the Environmental Impact Assessment report.
  • Lock-in Period for Local Shares: Shares allocated to affected area residents are subject to a three-year transfer restriction from the allotment date, promoting long-term local participation and preventing immediate speculation.

These specialized provisions create a regulatory environment that acknowledges the distinct challenges of hydropower development while ensuring robust investor protection, promoting meaningful community involvement, and facilitating the financing of critical national infrastructure projects.

4. Securities Purchase (Public Issuance) Directive, 2073

This directive systematizes the process of collecting applications and handling funds for public issuances through the ASBA (Application Supported by Blocked Amount) system.

Scope and Key Provisions:

  • Authorized Collection Centers: Banks and Financial Institutions (BFIs) must be specifically authorized by SEBON to act as application collection centers.
  • Fund Blocking: Upon receiving an application, the BFI must block the corresponding amount in the investor’s account until the allotment process is complete.
  • Verification and Reporting: The Issue Manager verifies applications and checks for duplicates. BFIs must submit daily summaries and detailed reports of applications to the Issue Manager.
  • Settlement Timeline: The directive stipulates strict timelines for the transfer of allotted funds to the issuer and the release of unallotted funds back to investors.

Sector-Specific Note: The ASBA process is mandatory for all public issuances, regardless of the sector. The procedures for application collection, fund blocking, and settlement are uniform for all companies, including those in the hydropower sector.

General introduction to the market players in the securities market: 

  1. Issuer (Securities Issuer): A company or institution that creates and sells its own securities (like shares or bonds) to the public to raise capital. Nepalese Example: company_a (This represents any company, e.g., Nepal Telecom or NIC Asia Bank, that conducts a public offering to list its shares on the stock exchange).
  2. Securities Exchange Market (Stock Exchange): An organized marketplace that provides a platform for buying and selling securities. It facilitates trading, price discovery, and ensures transparency. Nepalese Example: Nepal_stock_exchange (This is the Nepal Stock Exchange Limited (NEPSE), the sole stock exchange in Nepal).
  3. Depository: An institution that holds securities (e.g., shares) in electronic (dematerialized) form for investors, maintaining ownership records. Nepalese Example: meroshare_id (This is the portal for CDS and Clearing Limited (CDSC), which is the only depository in Nepal).
  4. Depository Participant (DP): An agent (like a bank or broker) of the depository that acts as an intermediary between the investor and the depository. Investors open Demat accounts with DPs to hold their electronic shares. Nepalese Example: sanima_pms_id (This represents a DP, e.g., Sanima Bank Ltd. or Nabil Invest, which are authorized by CDSC to provide Demat account services).
  5. Securities Broker: A licensed professional or firm that is a member of the stock exchange. They execute buy and sell orders on behalf of investors in return for a commission. Nepalese Example: kohinoor_id (This represents a brokerage firm, e.g., Kohinoor Investment and Securities Pvt. Ltd. or Aryatara Investment and Securities Pvt. Ltd.).
  6. Portfolio Management Service (PMS): A service offered by professionals to manage a client’s investment portfolio (collection of securities) based on their financial goals and risk tolerance. Nepalese Example: sanima_pms_id (This also represents a PMS provider, e.g., Sanima Capital Ltd., which manages investments on behalf of clients).

5. Securities Public Issuance Centralized Electronic Service Directive, 2074

This directive operationalizes the C-ASBA software platform, which centralizes and automates the application and verification process for public issuances.

Scope and Key Provisions:

  • C-ASBA System: The platform allows for electronic application entry, verification of investor details, and duplicate application checks.
  • Investor Registration: Investors must obtain a C-ASBA Registration Number (CRN) from their bank before applying.
  • Electronic Application: The “My Share” portal enables investors to apply electronically.
  • Agreements and Fees: CDS and Clearing Ltd. signs agreements with Issue Managers and BFIs for using the system, and charges prescribed fees for its services.

Sector-Specific Note: The use of the C-ASBA system is a technical requirement for all public issuances. It applies equally to hydropower companies, ensuring efficiency and reducing errors in the application process.

6. Book Building Directive, 2077

This directive provides an alternative method for price discovery for IPOs, making the process more market-driven through competitive bidding by institutional investors.

Scope and Key Provisions:

  • Eligible Institutional Investors (EIIs): Institutions must be approved by SEBON to participate in the book-building process.
  • Price Discovery: The issue price is determined based on bids submitted by EIIs. A “cut-off price” is established, and all allotted shares are sold at this price.
  • Public Price Discount: The price for the general public is set at a 10% discount to the cut-off price discovered through the book-building process.
  • Process: The process involves a preliminary prospectus, discussions with EIIs, a bidding period, and final allotment.

Sector-Specific Note: Book building is an optional pricing method available to companies that meet certain eligibility criteria related to financial health and credit rating. A hydropower company that qualifies may choose this method to achieve a potentially higher and more market-reflective issue price.

7. Securities Issuance and Allotment Directive, 2074

This directive governs the final stages of the public offering process, including the allotment of securities to applicants and the subsequent settlement.

Scope and Key Provisions:

  • Allotment Methodology: The directive mandates a standardized allotment process. Typically, all valid applicants are first allotted a minimum number of units. Remaining securities are then allotted proportionally to applicants who sought larger quantities.
  • Timelines and Penalties: Strict deadlines are set for completing the allotment and transferring funds. Failure to adhere to these timelines obligates the issuer to pay interest on delayed refunds.
  • Rights Share Issuance: Specific rules govern the issuance of rights shares to existing shareholders, including pre-conditions and procedures for selling any unsold rights shares.
  • Quotas: The directive mandates quotas for certain investor groups, such as Nepalese citizens working abroad and company employees.

Specifics for Hydropower: The general allotment rules apply uniformly. However, for hydropower companies issuing right shares or FPOs specifically to fund a project, the directive reinforces the pre-conditions also found in the Securities Registration and Issuance Regulations, such as the requirement for financial closure and executed project agreements.

Phase 3: Intermediaries - Engaging a Licensed Merchant Banker

This phase focuses on the mandatory engagement of a key intermediary: the Merchant Banker. A company cannot navigate the public issuance process independently; it must appoint a SEBON-licensed Merchant Banker to manage the offering. This phase involves selecting a qualified firm that will act as the company’s guide and executor through the complexities of the capital market.
The following regulation becomes relevant when a company begins the process of selecting and contracting an institution to manage its securities issuance.

Order

Document Name (English)

Primary Trigger Event

8

Merchant Banker Regulations, 2064

Hiring an Issue Manager (Merchant Banker).

8. Merchant Banker Regulations, 2064

These regulations establish the comprehensive framework for licensing, governing, and overseeing Merchant Bankers in Nepal. A Merchant Banker is a specialized securities professional authorized by SEBON to provide critical financial services related to capital market activities. For an issuing company, understanding these regulations is essential for selecting a competent and compliant partner.

Scope and Key Provisions:

The regulations define the ecosystem in which Merchant Bankers operate, setting high standards for their operation.

  • Licensing and Authorization: Any institution wishing to operate as a Merchant Banker must obtain a license from SEBON. The application process is rigorous, requiring detailed documentation on the firm’s financial status, ownership structure, and the qualifications of its directors and executive chief. SEBON grants licenses for specific functions, and the Merchant Banker must maintain a minimum paid-up capital, which varies depending on the services offered (e.g., higher capital is required for underwriting).
  • Defined Merchant Banking Functions: The regulations specify the distinct services a Merchant Banker can be licensed to provide. The most critical function for an issuing company is that of the Issue and Sales Manager, who is responsible for preparing the prospectus, managing the entire issuance process, and ensuring compliance with all relevant laws. Other functions include:
    • Underwriter: Guarantees to purchase any unsold securities during a public offering.
    • Share Registrar: Maintains records of shareholders and manages share transfers.
    • Investment/Portfolio Manager: Manages investment portfolios on behalf of clients.
    • Institutional Consultant: Provides advisory services on matters like mergers, acquisitions, and corporate restructuring.
  • Governance and Personnel Standards: To ensure professionalism, the regulations impose strict qualification requirements for the Merchant Banker’s leadership. The chairman, a majority of the directors, and the chief executive officer must possess relevant academic credentials (e.g., in finance, management, or law) and a minimum number of years of experience in the sector.
  • Operational and Financial Discipline: Merchant Bankers are subject to ongoing oversight:
    • Capital Limits: Their business volume is capped relative to their net worth. For example, an underwriter can only guarantee issues up to three times its latest audited net worth.
    • Fee Structures: The regulations stipulate maximum fees that can be charged for services, such as a cap on the percentage of the issue amount that an Issue Manager can charge.
    • Reporting and Transparency: They must submit regular financial and operational reports to SEBON and establish internal funds for risk management and corporate social responsibility.

Sector-Specific Note: The regulations governing Merchant Bankers are general and apply uniformly across all sectors. There are no distinct provisions that apply specifically to Merchant Bankers serving hydropower companies. The fee structures, licensing requirements, and professional standards are the same regardless of the client’s industry. Therefore, a hydropower company would engage a Merchant Banker under the exact same regulatory framework as a company from any other sector. The Merchant Banker’s role in advising on project-specific risks, such as those related to Power Purchase Agreements (PPAs) or construction, falls under their standard professional advisory and issue management responsibilities as defined by the regulation.

Phase 4: Listing and Trading - Becoming a Publicly Traded Company

After successfully issuing securities to the public, a company must transition to the secondary market, where its shares will be continuously traded. This phase involves the formal process of listing the securities on the stock exchange, converting them to electronic form, and adhering to the rules that govern daily trading and settlement. The regulations in this phase ensure market integrity, transparency, and liquidity for investors.

The following documents dictate the procedures from the listing application to the final settlement of each trade.

Order

Document Name (English)

Primary Trigger Event

9

Securities Listing and Trading Regulation, 2075

Applying for listing on the stock exchange.

10

Securities Listing Regulations, 2075

Completing the listing agreement with NEPSE.

11

Central Depository Service Regulation, 2067

Dematerializing shares.

12

Central Securities Depository Service Bylaws, 2068

Interacting with the depository (CDSC).

13

Securities Transaction Operation Bylaws, 2075

Shares begin trading on NEPSE.

14

Securities Transaction Clearing and Settlement Bylaws, 2069

Settlement of share trades.

9. Securities Listing and Trading Regulation, 2075

This SEBON regulation provides the overarching legal framework for listing securities on the stock exchange and conducting secondary market transactions. It establishes the standards for market operation, investor protection, and continuous compliance for listed companies.

Scope and Key Provisions:

  • Mandatory Listing: Any organized institution that has publicly issued securities must list them on the stock exchange to enable trading. The application for listing must be submitted soon after the prospectus is approved.
  • Listing Agreement: The company must enter into a formal listing agreement with the stock exchange, committing to uphold good governance, disclose price-sensitive information promptly, and provide financial and other necessary details on time.
  • Classification of Listed Companies: The stock exchange must classify listed entities into categories (A, B, G, Z) based on criteria such as paid-up capital, profitability, dividend history, credit rating, and compliance with reporting requirements.
  • Suspension and Delisting: The regulation outlines conditions under which trading of a company’s securities can be suspended, such as failure to pay annual listing fees, submit reports, or provide accurate information. Delisting can be voluntary (with strict conditions) or mandatory (e.g., due to merger, liquidation, or prolonged non-compliance).
  • Market Operation: It mandates the use of an automated electronic trading system that operates on a price-time priority basis. The regulation also establishes circuit breaker mechanisms to halt trading during periods of extreme market volatility.

Sector-Specific Note: The listing requirements and ongoing obligations are uniform for all sectors. A hydropower company, like any other listed entity, must comply with the mandatory disclosure rules, particularly the immediate disclosure of any material information that could affect its share price. This would include project-specific updates such as construction milestones, changes in Power Purchase Agreements (PPAs), or regulatory approvals.

10. Securities Listing Regulations, 2075

These bylaws, issued by the Nepal Stock Exchange (NEPSE), provide the detailed procedural manual for the listing process. They specify the application documentation, fees, and the continuous obligations of a listed company.

Scope and Key Provisions:

  • Application Process: The company must submit a formal application to NEPSE with extensive documentation, including its constitutional documents, financial statements, prospectus, and details of its registration with the Central Depository System (CDS).
  • Listing Fees: Fees are tiered based on the company’s paid-up capital or the value of the securities being listed.
  • Continuous Disclosure: Listed companies are required to submit annual and quarterly financial reports within stipulated deadlines. They must immediately disclose any material event, such as decisions on dividends, major asset transactions, changes in management, or corporate actions like mergers and splits.
  • Corporate Actions: New securities resulting from corporate actions (e.g., bonus shares, rights shares) must also go through a listing process before they can be traded.

Specifics for Hydropower: The general disclosure requirements apply fully. For a hydropower company, this means that details of significant contracts (like PPAs), project financing agreements, and technical project reports may need to be disclosed as part of the listing application or subsequent material event reporting.

11. Central Depository Service Regulation, 2067

This regulation mandates the dematerialization (conversion to electronic form) of all listed securities and establishes the framework for the Central Depository System (CDS), operated by CDS and Clearing Ltd. (CDSC).

Scope and Key Provisions:

  • Mandatory Dematerialization: All securities listed on the stock exchange must be dematerialized and held in electronic form within a specified timeframe after the CDS begins operations. Subsequent issuances by listed companies must be in electronic form only.
  • Licensing and Governance: The regulation sets the licensing criteria, capital requirements, and governance standards for the Central Depository Company (CDSC).
  • Investor Protection: It requires the establishment of an Investor Protection Fund to compensate investors for losses caused by negligence or fraud by the depository or its participants.

Sector-Specific Note: The dematerialization requirement is universal. A hydropower company with listed shares must ensure all its shares are converted into electronic form and held within the CDS.

12. Central Securities Depository Service Bylaws, 2068

These operational bylaws, issued by CDSC, detail the day-to-day procedures for the depository system, including account management for investors and the processing of corporate actions.

Scope and Key Provisions:

  • Account Management: Investors must open a Demat account with a Depository Participant (DP) to hold securities electronically. The bylaws set the rules for account opening, maintenance, and closure.
  • Dematerialization and Rematerialization: They outline the specific procedures for converting physical share certificates to electronic form and vice versa.
  • Transfer of Securities: The bylaws govern both market transfers (resulting from trades) and off-market transfers (such as transfers due to inheritance or family arrangements).
  • Corporate Actions: CDSC facilitates the electronic distribution of corporate benefits like dividends, bonus shares, and rights shares to the Demat accounts of shareholders.

Sector-Specific Note: The procedures are identical for all companies. A hydropower company must cooperate with CDSC and its Registrar to ensure timely and accurate processing of corporate actions for its shareholders.

13. Securities Transaction Operation Bylaws, 2075

These NEPSE bylaws govern the technical and operational aspects of daily trading on the stock exchange. They define how orders are placed, matched, and executed.

Scope and Key Provisions:

  • Trading System: NEPSE must operate an automated electronic trading system that executes orders based on price-time priority.
  • Trading Sessions: The trading day is divided into sessions: an initial session for order entry, a continuous trading session, and a final session.
  • Order Placement: Investors must place orders through licensed brokers. The bylaws specify the required advance payment for buy orders.
  • Market Integrity: They prohibit manipulative practices like creating false markets or spreading rumors. NEPSE must maintain an electronic surveillance system to monitor trading activities.
  • Block Trading: Specific rules exist for large, single transactions (block trades) that qualify based on a percentage of the company’s paid-up capital or a fixed monetary threshold.

Specifics for Hydropower: The trading mechanisms apply to all listed securities. Large transactions involving hydropower company shares may fall under the block trading rules if they exceed the defined thresholds. 

Block Trading

Block trading is the execution of a very large single transaction of securities, typically involving a significant amount of a listed company’s stock. It is primarily used by institutional investors (like mutual funds, pension funds, and insurance companies) to buy or sell massive parcels of shares without causing undue volatility or disruption in the regular, smaller-volume market. Because these trades involve such large quantities, they are usually conducted at a negotiated price between the buyer and seller, often slightly away from the prevailing market price. The key purpose of a block trade is to transfer a large stake efficiently and discreetly.

In the context of the Nepal Stock Exchange (NEPSE), as governed by the Securities Transaction Operation Bylaws, 2075, Block Trading is specifically defined by a high-volume and high-value threshold. A trade qualifies as a Block Trade if its transaction size equals or exceeds 1% of the listed company’s paid-up capital or Rs 5 Crore, whichever amount is higher. This strict definition ensures that only the most substantial transactions are subjected to the dedicated block trading framework, preventing smaller trades from bypassing the regular market mechanism.

Due to their significant market impact, Block Trades are subjected to a mandatory controlled framework to ensure regulatory oversight and market stability. Before executing such a large transaction, investors must obtain prior approval from NEPSE. Once approved, the transaction is not executed on the main market floor but must be completed through the dedicated Block Trade Window via a registered broker. Furthermore, the approved transaction is required to be completed within a strict seven-day time limit of receiving NEPSE’s approval. This systematic approach ensures that large transfers are recorded accurately and follow a regulated process.

Finally, transparency and public disclosure are mandatory components of the Block Trading process. To ensure the market remains informed of large institutional movements, the details of every Block Trade – including the quantity traded, the negotiated price, and the parties involved (implied) – must be publicly disclosed on the NEPSE website. This requirement maintains market integrity by providing timely notification of significant changes in share ownership, upholding the principle that high-volume trading must be conducted with full regulatory awareness.

14. Securities Transaction Clearing and Settlement Bylaws, 2069

These CDSC bylaws regulate the post-trade processes, ensuring the secure transfer of securities and funds between buyers and sellers after a transaction is executed on the exchange.

Scope and Key Provisions:

  • Clearing and Settlement Cycle: The standard settlement cycle is T+2, meaning transactions must be settled within two working days of the trade date.
  • Clearing Membership: Brokers must be members of CDSC to clear and settle trades. They must maintain a collateral deposit with CDSC.
  • Default Management: The bylaws define the procedures for a “close-out” if a broker or client fails to deliver securities or funds on time, including financial penalties.
  • Risk Management: The bylaws emphasize the integrity of the settlement process and allow CDSC to prohibit the clearing of transactions suspected of market abuse like insider trading.

Sector-Specific Note: The settlement process is standardized. Every trade in hydropower company shares is cleared and settled through this mandatory CDSC system, ensuring safety and finality for investors.

Phase 5: Ongoing Compliance - Maintaining Public Status

Once a company’s securities are listed and trading publicly, it enters a phase of continuous regulatory obligation. This phase involves adhering to stringent corporate governance standards, submitting to the ongoing oversight of the regulator, and complying with financial crime prevention laws. These requirements are designed to maintain market integrity, protect investors, and ensure the company’s long-term credibility as a public entity.

The following documents outline the perpetual compliance duties that a listed company must fulfill.

Order

Document Name (English)

Primary Trigger Event

15

Institutional Good Governance Directive for Listed Organized Institutions, 2074

Continuous obligation after listing.

16

Nepal Securities Board Regulation, 2064

Continuous oversight by SEBON.

17

Asset (Money) Laundering Prevention Act, 2064

Compliance with financial crime laws.

18

Guidelines on Targeted Financial Sanctions for Securities Markets Participants

Compliance with financial crime laws.

15. Institutional Good Governance Directive for Listed Organized Institutions, 2074

This SEBON directive establishes a comprehensive framework for corporate governance that listed companies must implement. Its objective is to ensure that listed entities operate with transparency, accountability, and fairness towards all shareholders and stakeholders.

Scope and Key Provisions:

  • Fundamental Principles: Listed institutions must adopt core principles of corporate governance, including accountability, transparency, equal treatment of shareholders, and responsibility towards stakeholders.
  • Board of Directors Structure and Conduct: The directive mandates specific requirements for the Board of Directors (BOD):
    • Separation of Roles: The positions of Chairman of the Board and Chief Executive Officer (CEO) must be held by separate individuals to ensure a clear separation of oversight and management.
    • Independent Directors: The board must include independent directors to provide objective judgment.
    • Term Limits: Directors have a maximum tenure of four years.
    • Conflict of Interest: Directors must disclose their interests and are prohibited from engaging in transactions where they have a conflict. They are also restricted from trading the company’s securities during their tenure and for one year thereafter.
  • Audit Committee: A dedicated Audit Committee, chaired by a director and including at least one financial expert, must be established. This committee is responsible for reviewing financial statements, monitoring the internal control system, and ensuring the appropriateness of the company’s procurement processes.
  • Compliance Officer: The company must appoint a qualified Compliance Officer responsible for ensuring adherence to all securities laws, regulations, and SEBON directives. This officer must prepare a compliance report certified by the auditor.
  • Prohibited Transactions: The directive strictly prohibits the company from giving or taking loans from directors or entities where directors have a financial interest. It also prohibits partnerships or asset leases with such related parties.

Sector-Specific Note: The corporate governance standards are universal. For a hydropower company, the directive’s emphasis on transparent procurement rules is particularly relevant given the large-scale purchasing involved in project construction and maintenance. The requirement for the Audit Committee to monitor the procurement system ensures that large contracts are awarded transparently and economically.

16. Nepal Securities Board Regulation, 2064

This regulation operationalizes the Securities Act by detailing the organizational structure, extensive powers, and enforcement mechanisms of SEBON. It defines how the regulator supervises the market and takes action against non-compliance.

Scope and Key Provisions:

  • SEBON’s Authority and Duties: The regulation elaborates on SEBON’s duties, which include implementing government capital market policies, establishing codes of conduct for market participants, and maintaining international relations.
  • Investigation and Enforcement Powers: SEBON is granted significant investigative authority. It can conduct inspections, summon individuals for questioning, and seize documents and assets related to an investigation.
  • Freezing of Securities: During an investigation into a securities offense, SEBON can order the freezing of transactions (purchase, sale, or exchange) of the specific securities under scrutiny.
  • Penalties: The regulation outlines a graduated scale of penalties SEBON can impose for violations, ranging from written warnings and financial fines to the suspension or revocation of licenses of market intermediaries.

Sector-Specific Note: The oversight and enforcement powers of SEBON apply uniformly to all listed companies. A hydropower company is subject to the same inspection regimes and can face the same penalties, including the freezing of its shares, if it or its officials are involved in securities law violations.

17. Asset (Money) Laundering Prevention Act, 2064

This Act establishes the legal framework for preventing money laundering and terrorist financing in Nepal. Its provisions indirectly impact listed companies through the obligations it imposes on financial intermediaries.

Scope and Key Provisions:

  • Obligations on Reporting Entities: Financial institutions and designated non-financial businesses (which include securities brokers and merchants) are defined as “Reporting Entities.”
  • Customer Due Diligence (CDD): These entities must perform customer identification and verification, maintain records, and monitor transactions.
  • Reporting Suspicious Transactions: They are required to report any suspicious transactions to the Financial Information Unit (FIU).
  • Penalties: The Act prescribes severe penalties, including imprisonment and asset confiscation, for money laundering offenses.

Sector-Specific Note: The Act does not directly regulate the operational aspects of a hydropower company. However, its shares and bonds are considered “assets” under the Act. Therefore, if a person designated under the Act owns shares in a hydropower company, financial intermediaries (like brokers and the central depository) are obligated to freeze those assets. The primary compliance burden falls on the intermediaries, but the listed company is indirectly affected by such actions on its shareholders.

18. Guidelines on Targeted Financial Sanctions for Securities Markets Participants

These SEBON guidelines provide specific procedures for Securities Market Participants (SMPs) to implement Targeted Financial Sanctions (TFS), which are measures to freeze assets and prohibit financial services for individuals and entities associated with terrorism or proliferation.

Scope and Key Provisions:

  • Sanctions Lists: SMPs must screen customers and transactions against two primary lists: the United Nations Consolidated List and a Domestic Terrorist List published by the Ministry of Home Affairs.
  • Screening and Matching: SMPs must conduct ongoing screening of clients, beneficial owners, and transaction parties. A “confirmed match” triggers immediate action.
  • Immediate Action Required: Upon a confirmed match, SMPs must without delay:
    • Freeze Assets: Freeze all funds and assets (including shares/demat accounts) owned or controlled by the designated person.
    • Prohibit Services: Refrain from providing any funds, assets, or financial services to the designated person.
  • Reporting: SMPs must report any freezing actions to SEBON within three days and file a Suspicious Transaction Report (STR) with the FIU.

Sector-Specific Note: These guidelines directly impact the trading of a hydropower company’s securities. If a shareholder is identified as a designated person, the SMPs (brokers, depository) are required to freeze that shareholder’s holdings. The hydropower company itself must cooperate with the regulator and the intermediaries in this process, but the primary obligation for screening and freezing lies with the SMPs.

Phase 6: Advanced Stage - Special Activities

This phase encompasses advanced corporate finance activities that a mature, listed company might undertake. These activities, such as allowing investors to trade on margin or engaging in mergers and acquisitions (M&A), involve complex regulatory frameworks designed to manage significant risk and ensure market stability. The regulations in this phase apply once a company is well-established in the public market.

The following documents govern these specialized financial and corporate actions.

Order

Document Name (English)

Primary Trigger Event

19

Margin Trading Facility Directive, 2074

Shares become eligible for margin trading.

20

Merger/Acquisition Directive for Listed Institutions, 2079

Company explores M&A with another listed company.

19. Margin Trading Facility Directive, 2074

This SEBON directive establishes the framework that allows licensed securities brokers to offer margin trading facilities to investors. Margin trading enables investors to buy securities by borrowing a portion of the purchase amount from the broker, thereby using leverage. The directive focuses on risk management by setting strict eligibility criteria for both brokers and the securities that can be purchased on margin.

Scope and Key Provisions:

  • Eligibility of Brokers: A securities broker must have a minimum net worth of five crore rupees and obtain prior consent from the Nepal Stock Exchange (NEPSE) before offering margin trading services. A broker’s total lending for margin trading is capped at two times its certified net worth.
  • Eligibility of Securities: Not all listed securities qualify. To be eligible for margin trading, the issuing company must meet high standards of stability and investor confidence, including:
    • A minimum of 10,000 shareholders.
    • A positive net worth.
    • A track record of distributing an annual dividend of at least 10% for the two consecutive fiscal years immediately preceding the margin trade.
  • Margin Requirements: To mitigate risk, the directive mandates the collection of an initial margin from the client. The broker must collect a minimum of 30% of the share’s value (calculated as the lower of its 120-day average price or current market price). A maintenance margin of 20% must be upheld throughout the life of the margin trade.
  • Default Management: If a client fails to meet a margin call, the broker is authorized to sell only the shares that were purchased using the margin facility to settle the account.
  • Reporting and Transparency: Brokers must report all margin transactions to NEPSE daily and to SEBON weekly. NEPSE must publicize aggregated margin trading data on its website to ensure market transparency.

Sector-Specific Note: The eligibility criteria are uniform across all sectors. For a hydropower company’s shares to be available for margin trading, the company must simply meet the stated financial health and shareholder distribution benchmarks. There are no additional sector-specific conditions.

Margin Trading: 

Margin Trading is a specific facility that allows investors to purchase securities by borrowing funds from an authorized financial intermediary, typically a securities broker. Essentially, the investor pays only a partial amount of the total cost – known as the margin – while the broker funds the remaining portion. This allows the investor to use leverage to buy a larger quantity of shares than they could afford outright, aiming to amplify potential profits. The introduction of this facility is intended to provide investors with greater capital access and to expand the scope of work for securities brokers in the market.

In the regulatory framework, like the Margin Trading Facility Directive, 2074, the facility operates under strict conditions to manage the inherent risk of leverage. Brokers who wish to offer this service must meet stringent financial criteria, such as maintaining a minimum Net Worth of at least Rs 5 Crore, and their total lending is capped at two times their certified Net Worth. Importantly, the facility is only available for the shares of listed institutions that demonstrate financial stability, including having a positive Net Worth and a consistent record of distributing at least 10% annual dividends for the last two consecutive fiscal years.

To mitigate risk, the system mandates specific collateral requirements from the client. An Initial Margin of 30% of the share’s price (based on the lower of the current market price or the 120-day average) must be paid upfront by the client. Furthermore, a minimum equity level, the Maintenance Margin, typically set at 20%, must be preserved throughout the trading period. If the share price drops and the client’s margin falls below this maintenance level, the broker issues a Margin Call demanding immediate top-up. Failure by the client to meet this call authorizes the broker to sell the margined shares to cover the debt, ensuring the broker’s risk exposure is managed according to the regulatory guidelines.

20. Merger/Acquisition Directive for Listed Institutions, 2079

This directive provides a systematic and transparent procedure for mergers, amalgamations, and acquisitions involving companies listed on the stock exchange. It ensures that such significant corporate restructuring events are conducted with regulatory oversight, protecting the interests of all shareholders.

Scope and Key Provisions:

  • Structured Approval Process: The process involves a two-stage approval from SEBON. Companies must first obtain a preliminary consent based on an initial agreement and a time-bound work plan. Final consent is granted after a due diligence audit, determination of a share swap ratio, and approval from the companies’ general assemblies.
  • Due Diligence and Valuation: An independent valuer must conduct a due diligence audit (DDA) of the assets, liabilities, and businesses of the involved companies. The final share swap ratio must be based on this DDA report and approved by the respective boards of directors.
  • Trading Halt: Upon an initial agreement for an M&A, the trading of shares belonging to the basic shareholders (typically promoters and large holders) of the involved companies is frozen until the general assembly makes a decision on the proposal. This prevents insider trading based on non-public, price-sensitive information.
  • Timeline and Integration: The entire M&A process must be completed within six months of the preliminary agreement. After receiving final approval and completing the legal integration, the shares of the new or surviving entity may be halted for a short period (up to 15 working days) to reconcile shares and update records with the central depository.
  • Regulatory Coordination: If the companies involved are regulated by other sector-specific bodies (e.g., for banking, insurance, or energy), consent from those regulatory bodies must be obtained and submitted to SEBON as part of the application process.

Specifics for Hydropower: The M&A process for a listed hydropower company is largely the same as for any other sector. The key sector-specific consideration is regulatory coordination.

  • Sectoral Regulatory Consent: If a hydropower company is undergoing an M&A, it must likely seek pre-consent and final consent from its relevant sectoral regulator (e.g., the Ministry of Energy, Water Resources, and Irrigation or the Department of Electricity Development, Electricity Regulatory Commission) in addition to SEBON’s approval. This ensures the transaction also complies with energy sector regulations.
  • Post-Merger Ownership Structure: If a listed hydropower company merges with an unlisted entity, the resulting company must ensure its share ownership structure complies with any specific requirements set by the sectoral regulator or prevailing law within one year of commencing integrated operations.

This phased guide provides a comprehensive roadmap for companies exploring fundraising through securities in Nepal. From the foundational Securities Act to advanced merger directives, each phase has specific laws that must be followed. For hydropower companies, additional provisions like PPA requirements, project-affected area quotas, and partial payment shares are critical.