NEPSE eyes capital raise, strategic partner entry

KATHMANDU: The Nepal Stock Exchange (NEPSE) Restructuring Report 2082 has proposed significant reforms in NEPSE’s capital and ownership structure, urging the government to modernize the exchange and enhance its competitiveness.

The report emphasizes that, to develop and expand Nepal’s capital market, NEPSE requires a combination of capital increase and the introduction of strategic partners.

According to the report recently published by the Ministry of Finance, structural reforms are necessary for NEPSE to face future challenges effectively.

As per the report, the Securities Market Operation Regulations, 2064, require a minimum paid-up capital of Rs 3 billion for a secondary market operator.

The report highlights the need for NEPSE to continually invest in technology, human resources, physical infrastructure, research and development, service expansion, and the establishment of auxiliary institutions.

To meet these requirements, an immediate increase in NEPSE’s paid-up capital is considered essential.

Currently, issuing bonus shares is viewed as an appropriate measure to raise capital to the Rs 3 billion threshold.

For further development and expansion, options such as rights shares or issuing new shares are available, but the report stresses that a clear decision on strategic partnerships must precede any capital increase.

Such steps aim to strengthen NEPSE in the long term and meet investor expectations.

The report notes that, although Nepal’s capital market has gradually developed over the past decades, operating NEPSE in its current structure may hinder its ability to capitalize on future opportunities and address challenges.

Restructuring of the board of directors, management, technology, infrastructure, and other systems could accelerate NEPSE’s growth.

However, given existing operational practices, incremental reforms alone may not achieve the desired outcomes.

Therefore, the report underlines the need for broad improvements in management, technology, services, and infrastructure, accompanied by changes in board composition and ownership.

The report states:

“Although Nepal’s capital market has developed gradually over the past decades, considering the pace and nature of its expansion, it will be difficult for NEPSE to face future opportunities and challenges under the current structure. While restructuring the board, management, technology, infrastructure, and other systems could accelerate growth, relying solely on incremental improvements within the existing framework will not achieve the expected results. Therefore, comprehensive reforms in management, technology, services, and infrastructure, along with changes in the board structure and ownership, are necessary.”

To enhance NEPSE’s competitiveness and expand modern services aligned with investor expectations, the report emphasizes the need for strategic partners. Strategic partners would help bridge gaps in technical knowledge, management expertise, and infrastructure.

International practices suggest that strategic partners are often granted up to 40% ownership; in NEPSE’s context, the report recommends providing 15–25% ownership with a minimum 10-year lock-in period.

The report sets clear criteria for selecting strategic partners, including the capacity to support NEPSE’s modernization through advanced information technology, investment tools, and services.

Recommended qualifications include: being among the top 20 stock exchanges globally by trading volume, having at least 20 years of experience in stock exchange operations, experience in managing or partnering with other exchanges, ability to support NEPSE’s modernization, use of advanced IT and modern tools, and full-time membership in the World Federation of Exchanges.

Strategic partners could be brought in either by issuing new shares or by existing shareholders selling their stakes.

Given the Nepal government’s policy of gradually divesting its investments in public institutions, government-held shares in NEPSE could also be divested, or shares could be sold by non-government shareholders to bring in strategic partners.

The report notes that the process of divesting government ownership would follow the Public Enterprises (Government Investment) Management Act, 2050, involving multiple stages and approvals from the Cabinet, Ministry of Law, Ministry of Finance, Government Investment Management Committee, and the Asset and Liability Evaluation Committee, making it a lengthy and complex process.

Consequently, issuing new shares may not immediately reduce government ownership, and divestment procedures could slow the entry of strategic partners.

The report suggests that strategic partners can be brought in more efficiently if non-government shareholders sell their stakes.

NEPSE’s assets and liabilities should be valued according to international standards and peer-reviewed to determine a fair per-share price for the sale.