CDS and Clearing (CDSC) is going to make a policy arrangement to classify the dematerialized (converted into electronic) securities of companies listed in the secondary market into two groups, founders and general public.

For this, CDSC has prepared 'Securities Dematerialization Operational Guidelines 2082' and sent it to the regulatory body Securities Board for approval.  In the

directive, it is proposed to give different 'International Securities Identification Number' (IIN) for companies in all other sectors like banks and financial institutions and insurance companies. AiZin is a number given for management of physical shares converted into electronic (dematerialized) shares. 

There have been different opinions regarding this arrangement that CDSC is going to make. Major founding shareholders, including IPPAN, the association of independent power producers, have opposed the new guidelines. Ordinary investors have said that this policy is in the interest of the capital market and investors. If the guidelines are passed, the related companies will get separate IDs for founders and common shares as per their articles of association and regulations. According to the law, after the period (three-year lock-in period) in which founder shares cannot be transacted, the companies have to formally apply to CDSC to convert them into common shares. At present, banks and financial institutions and insurance companies have this arrangement, but not in the case of companies in the rest of the sector. 

Therefore, founder and common shares of banks and financial institutions have been kept in different groups (separate Ijins). After the lock-in period, converting the founder shares into general public requires permission from the relevant regulatory bodies, the National Bank and the Insurance Authority. Apart from that, founder and general shares are held in the same name for companies in the region. Founder shares cannot be traded for three years, even if they are in the same name.

 But after three years, the founder's shares are automatically converted into ordinary shares and can be traded without interruption. After the implementation of the guidelines, in the case of companies in other sectors such as banks and financial institutions and insurance, founder and general shares will have to be kept in different names throughout the lock-in period. Even after that period, the founder shares cannot automatically be converted into common shares. 

CDSC's latest decision regarding the registration of dematerialized shares of companies will affect 87 billion shares worth 87 billion in 58 industries including energy, media, and cement, IPPAN, an independent energy producer's organization, claimed. According to this, only 47 projects in the energy sector will be affected and 530 million shares worth 53 billion will be affected, as well as the investment of 37 companies that have applied to issue shares worth 41 billion.

Energy producers claim that this step will have a big impact, especially in the energy sector. According to IPPAN, even the target of producing 28,500 megawatts of electricity within 10 years will be impossible. After stopping the process of dematerialization of shares for a long time, CDSC has finally sent the direction to the Securities Board to issue separate ISIN numbers for the shares issued to the founders and general public of all the companies, Ippan alleged. But the Association of Share Investors has claimed that there are two essentials to separate founder and common shares. 

'Whether it is because of CDSC's system or because of some other reason, it has been found that the shares of some companies with the same ID have been bought and sold in the market without the expiry of the lock-in period. For this reason, the Securities Board has already taken action against the two founding shareholders," said Keshav Prasad Shrestha, President of the Nepal Stock Market Investors Association, "a flagging code is needed to separate founder and common shares. Our CDSC system does not give that code. For this reason, if someone wants to commit fraud, they can also trade shares during the lock-in period and many such incidents are happening in the market.

He argues that to prevent such distortions, separate IDs are needed for founders and general shares.  "There is a possibility of unauthorized transactions if all the shares are kept in the same account. From which founders are taking wrong advantage. Not all founders know this. For this reason, to prevent the way of illegal trading for limited founders, two Igins are required at least for the lock-in period.' Another issue is that the provision that all stock markets can be traded from the day after the lock-in period ends, as shares are supplied to the market at once, the share price is badly affected. He said that a new arrangement is also necessary to stop this trend. 

What's in the directory? 

The law has given the CDSC the right to create an operating manual for the management of dematerialized shares of companies. It is for this reason that after 15 years of its establishment, CDSC made the 'Securities Dematerialization Operational Guidelines 2082'. which includes banks and financial institutions and companies in all sectors along with insurance.  According to the

guidelines, companies must classify dematerialized (converted into electronic) securities into two groups, founders and general public, as per their articles of association and regulations. There is a three-year 'lock-in' period for founder shares in companies. Shares of such group cannot be sold during that period. In the case of companies in the mentioned sector, even after the 'lock-in' period is over, the process including permission from the relevant regulatory body must be completed to convert the founder's shares to the general public. 

But now, a single ID is given for companies in sectors including hydropower, investment, production and processing (except banks and financial institutions and insurance). Founder and general shares are being held in the same name. Companies cannot sell founder shares for three years (lock-in period) after the IPO allotment. Even if you stay in the same account, the founder's shares are withheld during the 'lock-in' period, while only ordinary shares are traded. After completion of three years, after 12 midnight, the founder's shares are automatically converted into common stock and open for sale in the market at the same price. 

This system has been earning huge profits as founder shares can be sold at the same price as ordinary shares. In this temptation, the tendency of the founding shareholders to exit the company by selling a large amount of shares at once is increasing. CDSC claims that founder and common shares are going to be separated to prevent this distortion. 

Jalvidyut founding shareholders sell many shares after the lock-in period

Most of the founding shareholders of hydropower projects sell their shares after the 'lock-in' period and exit from the secondary market has also been shown by the Nepal Securities Board. The report pointed out that the founding shareholders of the company themselves do not believe that the hydropower project they have established will give good returns in the long run. A study conducted by the Securities Board regarding "the current state of the share structure of the listed companies of the hydropower group and its impact" has shown that most of the founding shareholders leave after the "lock-in" period (the period in which shares cannot be sold) is over. 

Similarly, within the same 'lock-in' period, some founder shareholders in collusion with sales managers have sold founder shares against the law (lock-in period not ending), according to the Securities Board source, which has come for action from CDSC. "Some founders have sold shares before the end of the lock-in period, taken a loan by pledging the founder's shares to the bank, and sold the shares after the founder's shares were converted to the general public while the founder's shares were mortgaged in the bank," the source said. "The board is studying the details."

From time to time there have been incidents of founder shares being bought and sold in the market due to expiry of the lock-in period. From time to time there are problems in the system of NEPSE and CDSC. Taking advantage of this technical weakness, in collusion with sales managers, the cases of clever founder shareholders selling shares in the market even when the lock-in period has not expired have started to increase. According to the Securities Board, many investors have been recommended for action against this crime. 

CDSC's claim that the capital market will be regulated

CDSC has claimed that many distortions in the capital market will be solved after the implementation of the proposed guidelines. "This directory will greatly help in reliability, data management, statistical documentation etc. in the market," said Pravin Pandak, managing director of CDSC. This will make the capital market more reliable.' 

In Chapter 8 of Securities Central Depository Service Regulations, 2076, there is a provision that the Central Depository Company can implement the necessary regulations for the operation of the depository service by creating operational guidelines. According to the same arrangement, the CDSC has prepared operational guidelines for dematerialization and sent them to the Securities Board for approval. Niranjay Ghimire, spokesperson of the Securities Board, said that the operational guidelines regarding dematerialization of shares came from CDSC on Monday for approval. "The guidelines prepared by the CDSC have to be approved by the board, the draft has been received for that," he said, "The board will study and proceed with the necessary process." What is the process of

iZine? 

companies seek permission from the Securities and Exchange Board to issue IPOs to the public. After allotment of IPO, they apply to CDSC for dematerialization of shares (Demat). CDSC then dematerialises the shares and gives an AiZin code. According to law, CDSC is responsible for giving IZIN code. However, as the directory has not yet been made, CDSC requests a number (code) from NEPSE for the concerned company before issuing the ID. Thus, after CDSC asks for a code, NEPSE gives two codes for banks and financial institutions and insurance companies and one code for companies in the region.

Rashtra Bank and Savik's Insurance Committee have been giving two codes for the company because they have asked to separate the founder and common shares in the case of the companies they have licensed. NEPSE gives the same code as there is no separate regulatory body for companies in the rest of the region and there is no specific law. In this way, in the case of banks and financial institutions given two codes by NEPSE and in the case of insurance, CDSC registers founder and common shares under different IDs. In the case of companies in the rest of the region, NEPSE has given a code, and founders and ordinary shares have been kept under the same name.