On 16th January, the Security Board of Nepal (SEBON) released the regulation on SME securities trading — Securities Issuance and Transactions of Small and Medium Enterprises Regulation, 2081.
The approved regulation paves the way for companies with a maximum capital of NRs 250 million to raise capital through the secondary market while their securities will be traded under the sub index category of the Nepal Stock Exchange (NEPSE). Earlier, the initial draft proposed a separate platform to facilitate the trading of shares but later finalised on the sub index category.
What’s in the regulation?
- SMEs can issue shares after one financial year of operation.
- If a company undergoes a merger or changes in shareholding, it must re-register its securities, following the same process as the initial registration.
- The institution must prepare a prospectus and submit it to SEBON for approval, including detailed information about its capital structure, financial statements, agreements with issue managers, and fees.
- They can issue IPOs for 30% to 49% of their capital with a face value at NRs 100 while ensuring that their paid-up capital does not exceed NRs 250 million post-IPO.
- Credit rating is not mandatory for SMEs. But SEBON can mandate the rating if found necessary.
- Before issuing the IPO, 5% must be purchased by merchant bankers and 15% by institutional investors, both subject to a three year lock-in period.
- If the IPO is undersubscribed (less than 50%), the issuance will be canceled, ensuring that only SMEs with sufficient investors can successfully raise capital through the public.
- The share allotment should be concluded within 15 days from the closing date of subscription
- SMEs must have completed their annual financial audits and general meetings on schedule.
- SMEs can now issue IPOs at a premium rate. To qualify, businesses must demonstrate consistent profitability over the past three years and have a per-share net worth that exceeds their paid-up capital.
- Companies issuing IPOs at a premium can price their share twice their per-share net worth.
- Companies with directors or significant shareholders on the Credit Information Bureau’s blacklist or convicted of crimes related to money laundering or terrorism financing are prohibited from issuing securities publicly.
However, some investors have expressed their concerns that lax regulations could lead to speculative trading or the entry of unstable firms. To mitigate risks, SEBON may need to implement stricter criteria for IPO approvals, ensuring that only financially sound and well-managed companies gain access to public investment.
Overall, this new regulatory framework is a step toward a more inclusive capital market, providing SMEs with much-needed financing avenues while safeguarding investor interests through structured trading mechanisms.
By allowing companies to issue shares after one financial year of operation, SEBON has created an opportunity for emerging businesses, including startups, to raise funds through public investment.
With businesses like Daunne Agro Farm on pipeline to raise funds through the stock market, this policy is expected to foster entrepreneurship, create investment opportunities, and contribute to the country’s economic development.
