Nepal’s stock market experiences historic shutdown amid regulatory clash on trading regulations

A dispute regarding the classification of company shares in Nepal has brought the country’s stock market expansion to a standstill and raised concerns about locking up significant promoter capital. The controversy revolves around whether promoter shares and public shares of listed companies should be assigned separate International Securities Identification Numbers (ISINs), which are unique codes used globally to track securities. The Central Depository Services (CDSC) in Nepal has proposed mandating dual ISINs across all sectors, a move that critics argue would impose long-lasting restrictions on promoter capital and is unprecedented in the global securities market.

Months of deliberation by the Securities Board of Nepal (SEBON) have failed to resolve the dispute. It has been questioned whether CDSC has the legal authority to unilaterally implement such a significant policy change through a directive, with suggestions that amendments to the Companies Act and other laws may be required. SEBON Chairman Santosh Narayan Shrestha emphasized the urgency of resolving the issue, stating that the debate on the need for dual ISINs should not linger any longer.

As a result of the ongoing dispute, around a dozen companies with pending IPOs have been unable to list their promoter shares, leading to regulatory uncertainty for these companies. Nepal currently operates under a system where different sectors have different requirements for maintaining ISINs. While banks, financial institutions, and insurance companies have to keep separate ISINs for promoter and public shares, other sectors use a single ISIN with an automatic conversion after the lock-in period expires. The proposed move by CDSC seeks to extend the restrictions imposed on the banking sector to all listed companies, causing backlash from business groups and promoter shareholders.

The Independent Power Producers’ Association (IPPAN) estimates that 870 million shares valued at Rs87 billion across 58 companies, particularly in the energy sector, could be impacted by the directive. IPPAN Chairman Ganesh Karki raised concerns about the compounding effect of this decision on the government’s goal of achieving 28,500 megawatts of electricity production within a decade, warning that energy developers might struggle due to their capital being tied up indefinitely.

Business leaders have criticized the proposed dual-ISIN system, highlighting that it lacks international precedence and could harm investor confidence. They cited examples from India, Bangladesh, and Pakistan where a single ISIN system with electronic flags and disclosure requirements is used to track promoter shares, without enforcing structural separation. The Federation of Nepalese Chambers of Commerce and Industry and Nepal Chamber of Commerce emphasized that such a system would add confusion and insecurity to Nepal’s capital market environment.

On the other hand, retail investor groups have argued for the necessity of a dual-ISIN system to prevent market manipulation and illegal trading facilitated by the current single-ISIN system. Despite opposition from business groups, CDSC’s Managing Director Pravin Pandak has defended the proposal, asserting that dual ISINs are prevalent in many listed companies and are technically necessary to maintain accurate records. The ongoing debate underscores the challenges Nepal faces in aligning its securities system with international standards while balancing the interests of various market stakeholders.