Is Collusion and Corruption Distorting Nepal's Capital Market

Recently, the Initial Public Offering (IPO), a capital market tool intended to share benefits with the public, has been used to exploit investors. There is a trend of escalating project costs, bribing or influencing regulators, and misuse of public funds. This has led to weak dividend payouts and low returns on investment, ultimately depriving public shareholders of a return and deterring future investments.

A controversial claim by the Independent Power Producers’ Association Nepal (IPPAN) alleges that the Securities Board of Nepal (SEBON) demanded ‘rent’ in exchange for IPO approval. IPPAN filed a ‘rent-seeking’ case with the Commission for the Investigation of Abuse of Authority (CIAA), including an audio recording from a ‘power broker’, but no action has been taken by the anti-graft body. SEBON has not been able to strongly defend itself or act against the alleged ‘rent-seekers’.

Many hydropower companies that publicised this issue have been prevented from issuing IPOs. According to IPPAN President Ganesh Karki, SEBON’s delay in approving IPOs and rights shares has resulted in a loss of Rs 108.50 billion. This has negatively impacted investors who planned to raise capital from the public to develop hydropower projects.

Industry leaders believe the escalated costs of hydropower companies are a significant concern. They also find the unethical bargaining and rent-seeking by SEBON, the securities market regulator, for IPO and rights share approval to be ‘pathetic’.
Capital market development 

Initially, Nepal made a sincere effort to develop its capital market. A policy requiring banks and financial institutions (BFIs) to mandatorily issue 30% of their shares to the public created a strong foundation for this growth.

According to Nara Bahadur Thapa, former Executive Director of Nepal Rastra Bank, “If similar policies had been applied to the Foreign Investment and Technology Transfer Act (FITTA) and the Industrial Enterprise Act, Nepal’s capital market would be much stronger and more diverse.” The stock market, once dominated by the financial sector, has gradually diversified to include hydropower, manufacturing, trading and other companies.

Inconsistent regulatory oversight, however, is distorting the market rather than attracting real-sector companies. The Ministry of Finance (MoF), Nepal Rastra Bank (NRB), and Securities Board of Nepal (SEBON) are critical for streamlining policies and regulations to foster capital market development. Therefore, NRB and SEBON are in a prime position to play a significant role in transforming more private companies into public ones, thereby strengthening the capital market.

IPO and its public perception 

Through C-ASBA and bancassurance, the financial sector has established a strong connection with the capital and insurance markets. The Centralised Application Supported by Blocked Amount (C-ASBA) system was introduced by SEBON as an optional service on January 14, 2017, and became mandatory on July 16, 2017. Under this system, an investor’s bank account is blocked for an amount equal to their application money. The funds remain in the bank until the share allotment is finalised. After allotment, only the amount for the allocated shares is debited and the remaining amount is unblocked. If no shares are allotted, the entire blocked amount is released.

This was viewed as a major step toward modernising the traditional share application process. It allowed investors to benefit from digitalisation and ensured broader inclusion for people nationwide. The reform was considered a remarkable advancement in the capital market.

Following the modernisation of the primary market (IPOs, rights shares, FPOs, etc.), IPOs, particularly those with a face value of Rs 100, were heavily oversubscribed. This led to a strong push for premium share issuance based on a company’s financial strength and risk capacity. Market discrepancies began to emerge. At the same time, according to Rewat Bahadur Karki, former SEBON Chairperson, regulatory forbearance negatively impacted consumer protection, a key concern for interest groups monitoring public money.
The same issues arose with hydropower companies. Problems with dividend payouts, along with their escalating costs and contingent liabilities, have turned their IPOs into what some see as scams or deceptions for investors. Karki states that this goes against the spirit of the capital market, distorts the market and ultimately makes it difficult for genuine investors to raise capital due to a lack of public trust in these instruments.

Collusion of interest groups, regulators and private sector

Collusion among regulators, special interest groups, and private sector entrepreneurs has gradually transformed IPO schemes into a major scam. A lack of transparency in the issuance of premium shares has exposed a series of scandals, including those involving Sarbottam Cement and Himalayan Reinsurance. Previously, SEBON permitted premium-rate IPOs based on a company’s financial strength and risk-bearing capacity, a shift from the earlier standard practice of issuing shares at a face value of Rs 100 per unit.
The last three SEBON chairpersons have all faced controversy. Bhishma Raj Dhungana was removed by the cabinet for his alleged involvement in accepting a bribe to approve Sarbottam Cement’s premium share issuance. His successor, Ramesh Hamal, completed his tenure amid further controversy, having permitted Himalayan Reinsurance to issue shares at a premium rate. Hamal also tried to license a new stock exchange but the attempt failed after the Public Accounts Committee (PAC) of the Legislature Parliament investigated the case and brought a lawsuit to the Supreme Court.

After Hamal’s departure, a battle among interest groups came to light regarding the appointment of a new chairperson. Due to delays and controversy in the selection process, the position remained vacant for 11 months before the current chairperson, Santosh Narayan Shrestha, was appointed on November 25, 2024.
Shrestha has also faced a series of controversies, including accusations of bias in approving IPO proposals. He recently approved the IPO proposal for Bungal Hydropower, a company in which he himself is a promoter.

Dangers of ineffective regulation in the capital market

It is unfortunate that IPOs, designed to raise capital from the market and share benefits with the public, have become a source of trouble due to a lack of regulatory competence, ethics, integrity and commitment to consumer protection.

According to former SEBON Chairperson Karki, “The oversubscription of IPOs primarily reflects public confidence in these instruments. However, if there is an increasing trend of poor returns, people will stop buying these companies’ shares.” More than 56 listed companies are now non-functional or have closed, wiping out public money invested in their IPOs. Examples include Bansbari Shoes Industries, Birat Shoes, Morang Sugar Industry, Shri Ram Sugar Mills, Biratnagar Jute Mills, Necon Air and Arun Vegetable Ghee Industry. Some companies, such as National Hydro, are now trading at less than their face value in the secondary market. Given this, premium share issuance without a trustworthy and prudent regulatory regime could be a deadly strategy.

Furthermore, hydropower projects are handed over to the government after 30 years of operation and it remains unclear what will happen to public shareholders’ investments in these companies. The escalating costs and contingent liabilities of hydropower companies suggest that only the Board of Directors benefits, not other investors. While insider trading and collusion may temporarily inflate share prices, investors in the secondary market may eventually lose money if they are not fully aware of a company’s performance.
Given rampant scams, often in collusion with regulators, the private sector and interest groups, former Prime Minister Dr Baburam Bhattarai termed Nepal’s stock market a ‘gambling house’. Interest groups, however, argued to the public that such a high-level political statement caused a long-term depression. Bhattarai actually urged the public to invest but only after becoming aware of the companies’ strengths and their ability to pay future dividends.

This situation could repeat with new companies unless the government and regulators prioritise protecting public investors who subscribe to IPOs. Ultimately, this will distort the capital market and deter investment in the country.