| New Ordinances And Capital Market By Rabindra Bhattarai
How much of a boost will the Nepali capital market get with the new Securities Ordinance and Company Ordinance, issued late September?
The Securities Ordinance issued late September replacing the Securities Exchange Act 1984 has introduced a number of new provisions with the objective of boosting the capital market. Securities Board (SEBO) Nepal, the supreme regulator of Nepali capital market, was an ineffective body in the absence of sufficient laws but the new law has vested additional power on the board. Now the board can cancel the license of the stock exchange members as well as that of the stock exchange itself. After the enactment of the ordinance, the board is expected to be financially sound. The board can now arrange more financial resources to be self-sufficient. Before this, the board's income was limited to registration fee from the Stock Exchange, securities registration fee from companies, donation, government subsidies etc. It can now get a share in the commission that the stock exchange earns from its members. Similarly, there is a provision to set up a 'revolving fund' out of which the board can earn additionally.
In a significant provision, the Ordinance has opened the way to start over-the-counter (OTC) market. Though it is not yet clear as to who can operate the market and what conditions should be fulfilled, if the OTC market is opened, it will help investors. The securities not listed on the Stock Exchange or 'de-listed' from the Exchange (as Nepal Bank Limited is 'de-listed' now) can be traded on OTC market and no formal requirements are set for the eligibility of trading on OTC market. Before this, there was no provision for trading on such securities and investors have had to suffer losses when a company was 'de-listed' from the stock exchange. The Ordinance has also made a provision for establishing the Central Depository System (CDS) which will bring greater efficiency in the clearing and settlement system of the stock exchange. After establishment of this system, ownership transfer of securities will be possible by dematerialising securities and making electronic book entries. But who will run the organisation (the stock exchange or other independent institution) is still not clear. In some of the countries this is operated by the exchange and in some other countries by other institutions.
The Ordinance has made the directors more responsible to implement the direction of the board. If the company gets 'de-listed' from the stock exchange due to the negligence by the directors, then the directors will have to personally compensate the investors for the loss caused. But how the losses will be calculated is not clear. The Ordinance has also made a provision so that a company can sell securities through private placement (i.e. without making public offer). This will help companies to avoid the more expensive route of public offering when they have to raise a small amount. The Ordinance has increased the paid up capital requirement of a stock exchange company from Rs 1 crore to Rs. 5 crore.
The Company Ordinance too has made the capital market broader than the present level. It has allowed the company to determine the par value of the shares that it wants to issue if the minimum value is Rs. 50 and divisible by 10. This provision has made it easier for the company to collect share capital from an wider population. Earlier, the par value had to be of Rs. 100 due to which many lower income people could not dream of buying shares in companies. Similarly, some companies who wanted to have few shareholders could not set the par value of the share at, say, Rs. 1,000. Thus their cost of handling the share applications was excessively high.
In another provision, the ordinance has allowed companies to issue shares in premium as well as in discount under specified conditions. For example, a company can issue shares in premium if it has paid dividend continuously in the last three years, its net worth is positive and the AGM has approved the issuing of the share in premium. This provision is expected to encourage well-performing private limited companies to become public limited companies and issue shares to the general public. When such companies come to the public and get listed on the stock exchange, the stock market will be more vibrant.
In another provision, the Company Ordinance has stated that companies cannot give the shareholders any gift in cash or kind other than the dividend. This is expected to stop the practice of distributing travelling allowance and lunch allowance to the shareholders who attend the AGM. It had encouraged the shareholders to split their shareholding and get the shares recorded in the name of their family members so that they could receive higher amount of such gifts. This cost the companies more money in terms of not just travelling or lunch allowance to the shareholders, but also in terms of the printing cost of the annual report that was required to be sent to each shareholder recorded in the company's book. More importantly, as such gift was provided to only those shareholders who attended the AGM, it was becoming a nightmare to manage the AGM due to the large presence of the shareholders. More importantly, it is expected to stop the practice of bribing some key shareholders before the AGM date. The bribe was paid to keep some shareholders from raising issues in AGM that could be uncomfortable for the directors.
The companies can now issue share of different classes having different rights. Such practices can be found in developed countries like America, Canada etc. This provision helps promoters and the members of the current board of directors to maintain their control over the company by issuing common stocks that have no voting rights.
Similarly, the Ordinance has clearly specified the period within which the ownership transfer of the traded securities has to be affected. Now, the company must transfer the ownership within 15 days of buyer putting in an application. Earlier, it was not stated so clearly. Therefore, companies were taking even upto six months for ownership transfer. Due to this, the investors were losing a lot.
Another provision of the ordinance is the clarification of role of the Trustee. With this, the investors can have more secured debt instrument to invest in.
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