KATHMANDU: In a significant move to boost the capital market for small and medium-sized enterprises (SMEs), Nepal’s Ministry of Finance has drafted new Initial Public Offering (IPO) regulations that mandate a minimum subscription of 150 shares for investors. The draft, currently under review by the Cabinet, aims to facilitate IPOs specifically designed for SMEs, allowing them better access to the securities market and raising capital for growth. This new regulation, titled “Securities Issuance and Trading Regulations for Small and Medium Enterprises,” will take effect upon Cabinet approval.
Key Changes in IPO Regulations for SMEs
A notable change introduced in this draft is the requirement for investors to apply for at least 150 shares when subscribing to SME IPOs. During the share allocation, a minimum of 150 shares will also be distributed to each investor. This is a substantial increase from the current rule, which allows IPO applications for as few as 10 shares and similar allocations. Companies utilizing the book-building method, however, must still set a minimum of 50 shares per application and distribution.
In an effort to strengthen Nepal’s SME sector, this regulation intends to simplify the process for capital generation, enabling SMEs to leverage the securities market as a viable means of raising funds. The Nepal Stock Exchange (NEPSE) will establish a dedicated platform specifically for SMEs, where companies with a paid-up capital of less than NPR 250 million will be eligible to list and trade their shares.
Special Provisions for Rights Issuances
The draft includes unique provisions for rights issues by SMEs. Eligible shareholders can apply for additional shares beyond their initial entitlement, allowing for greater participation in the company’s equity. Any unsubscribed shares from the rights issue will be proportionally allocated to those shareholders who requested more than their allotment. This move is intended to simplify and facilitate share issuance for smaller firms and differs from the current practice of auctioning unsold rights shares by larger companies.
Trading Platform for SMEs
NEPSE’s new SME platform will exclusively host companies with a paid-up capital below NPR 250 million, though this limit could be adjusted based on market needs. Once listed, SMEs will be required to issue a public offering, with a minimum share issuance of 30% and a cap of 49% of total equity. A one-year waiting period will be mandatory for newly registered public companies before issuing shares, or immediately upon conversion from private to public.
SMEs may not need to undergo credit ratings initially, but the Board reserves the right to request a rating if it deems necessary. Under specific conditions, eligible companies will be allowed to issue shares at a premium price. Companies with a per-share net worth exceeding the paid-up capital, three consecutive profitable years, and a strong credit rating will be eligible to set IPO prices up to twice the net worth per share.
New Lock-In Period for Founders
Founders of SMEs will now face a mandatory lock-in period of three years, during which they cannot sell their shares, creating a stable foundation and ensuring long-term commitment. Additionally, companies held by private equity funds, venture capital, hedge funds, or other foreign-registered funds can sell shares to the public after a one-year lock-in period, provided they meet specific criteria.
The regulation also enforces a one-year restriction for directors, CEOs, auditors, company secretaries, and those involved in the company’s financial management from trading shares after they leave their positions.
Online Trading and Clearing System
Investors will be able to trade SME shares through brokers’ online trading systems in a manner similar to trading for other listed companies. Orders can be placed based on price and time priority. NEPSE will set initial trading prices post-listing and will enforce daily price variation limits similar to those applied to larger companies, including circuit breakers to control sudden fluctuations in trading.
The new platform will also feature a minimum and maximum volume requirement for SME share transactions, and the clearing operations will be managed by CDSC, the clearinghouse established by NEPSE. Furthermore, these companies will be required to publish quarterly financial reports to maintain transparency for investors.
Boost to Nepal’s SME Sector
This dedicated IPO platform for SMEs is a significant development in Nepal’s securities market, offering small and medium businesses a more structured opportunity to raise capital. Industry experts anticipate that the move will attract both domestic and international investors to the sector, aiding in its development and expansion.
These regulations are expected to bring transparency, improve governance, and create new opportunities in Nepal’s SME sector by opening new channels for funding. The Cabinet’s approval is now awaited to bring the regulations into effect, a step seen as a critical milestone for Nepal’s economic growth and capital market diversification.