KATHMANDU: Small and Medium Enterprises (SMEs) in Nepal are set to benefit from a newly established avenue to raise capital by listing on the stock market, offering them a unique platform separate from the traditional markets where larger companies have previously raised funds.
Previously, all companies in Nepal, whether small, medium, or large, followed the same process for raising capital by issuing Initial Public Offerings (IPOs) and listing on the secondary market. This process allowed these companies to influence market indices significantly. However, under a new framework, companies with a paid-up capital of less than NPR 250 million will now be able to operate on a separate platform specifically designated for SMEs. Companies already listed with a paid-up capital of under NPR 250 million will continue with their current trading arrangements.
This move is part of an effort to create a distinct trading mechanism where smaller companies do not impact the broader market index. The Securities Board of Nepal (SEBON) has recently implemented regulations for the issuance and trading of securities for SMEs. While the regulations have been finalized, the detailed operational provisions and mechanisms are still in the process of being developed. Nepse, the Nepal Stock Exchange, has been tasked with finalizing these operational details.
According to Nepse spokesperson Mura Hari Parajuli, the trading mechanism for SMEs will be carefully structured to ensure that they do not influence market indices. “The Nepse board will decide on preparing the regulations and trading systems, and once these are completed, the work will proceed,” he said. Once these regulations are approved by the board, they will be implemented, making it clear how SME companies will be listed and traded without disturbing the overall market index.
A key component of the new regulations is that all SME companies listed on this new platform will not influence the Nepse index, unlike larger corporations. Nepse has also outlined the need for additional tools and regulations to handle these companies, which could include a restriction on the minimum number of shares that can be traded and the permissible fluctuation in stock prices.
One of the notable aspects of the new regulations is the requirement for SMEs to subscribe to a minimum of 500 shares during an IPO. Similarly, companies with a face value of NPR 100 must also meet this minimum threshold for subscribing to shares in the primary market. Once these companies list on the secondary market, Nepse will maintain the same minimum threshold for trading shares.
In terms of the number of shares traded in the secondary market, Nepse is working on regulations that will maintain this 500-share minimum, similar to the existing rules for stocks with a face value of NPR 100. For bond markets, while the minimum subscription in the primary market remains 25 shares, smaller numbers of bonds can be traded in the secondary market.
Price fluctuations in the stock market will also be capped under the new regulations. Currently, listed companies are restricted to a price change of no more than 2% between consecutive trades, and a maximum of 10% fluctuation in price on any given day. These rules will be applied to SME companies as well, though there is a possibility that they may be adjusted in the future based on the level of risk involved.
In the past, smaller companies with lower paid-up capital could still be very valuable and capable of generating substantial profits. The introduction of this dedicated SME platform is seen as an effort to support these companies by ensuring that their trading does not directly affect the larger market, thus enabling them to thrive without influencing the trading environment for bigger companies.
The Securities Board’s new regulations stipulate that companies with paid-up capital under NPR 250 million will be classified as SMEs and will be required to abide by these updated rules. According to board spokesperson Niranjay Ghimire, all companies applying for IPO approval under NPR 250 million in paid-up capital will be granted approval to list and trade under this new SME platform.
However, companies that are already listed with paid-up capital under NPR 250 million will continue to trade as they have been in the current system, as their listing would not be affected by the new rules. These existing companies are some of the most valuable on the market, proving that smaller capitalized companies can still perform exceptionally well.
As the implementation of the new regulations moves forward, the board is also introducing other measures to ensure a safe and transparent process for investors. Institutions investing in shares of these SME companies will not be able to sell their shares until after three years, except for Private Equity and Venture Capital firms, which will have a one-year lock-in period.
With these new developments, SMEs in Nepal will now have a more structured and tailored platform to raise capital, a move that is expected to encourage more investment in the small and medium sectors of Nepal’s economy.