The report concludes that it is appropriate to select a strategic partner only if it can incorporate the necessary information technology and latest investment tools and services to support the modernization of NEPSE.
What you should know
A government study report has suggested that the government should sell its shares in the Nepal Stock Exchange (NEPSE) and bring in a strategic partner. The report suggests that it would be appropriate to give 15 to 25 percent ownership to the strategic partner.
On November 2, the Council of Ministers formed a suggestion committee on the restructuring of NEPSE. The committee, formed under the coordination of Chartered Accountant Prakash Jung Thapa, submitted the report to the government a few weeks ago.
The Council of Ministers meeting held last week decided to accept the report and gradually implement it. Based on the same decision, the Ministry of Finance made the report public on Tuesday.
The report states that a strategic partner is needed to provide the technical, managerial knowledge and infrastructure required to increase the competitive capacity of NEPSE and expand modern service facilities as expected by investors. For this, the report suggests that the percentage of NEPSE shares that should be provided to the strategic partner should be determined first.
‘While analyzing international practices conducted during the study, it was found that up to 40 percent ownership has been provided to such strategic partners, so in the context of NEPSE, it seems appropriate to provide 15 to 25 percent ownership (with a lock-in period of shares of at least 10 years) to the strategic partner,’ the report says.
The report concludes that it is appropriate to select a strategic partner only if it can bring in the necessary information technology and latest investment tools and services to support the modernization of NEPSE. The report also suggests the qualifications for a strategic partner. These include being among the top 20 stock exchanges in the world based on securities transactions, having at least 20 years of experience in operating a stock exchange, and having experience in partnership/management of other stock exchanges.
Similarly, the report also suggests that the company should be a full-time member of the World Federation of Exchanges (WFE) to become a strategic partner in NEPSE. The report also suggests that one expert director should be mandatorily represented on the board of directors of NEPSE from the strategic partner.
‘There are options to issue additional new shares to bring in strategic partners or for existing shareholders to sell their shares to strategic partners,’ the report says. ‘In the context that the Government of Nepal has been gradually disinvesting government investment in public institutions in recent times, it seems that the government investment in NEPSE should also be disinvested over time.’
For this, the report suggests that it would be appropriate to sell government share ownership to strategic partners, financial institutions (institutions that are under the direct regulation of Nepal Rastra Bank and Insurance Authority and are practicing relatively good corporate governance, ‘A’ class commercial banks, national-level development banks, life and non-life insurance companies) and the general public by having the assets and liabilities, commercial monopoly and reputation of NEPSE evaluated and based on that, the per-share price should be fixed.
However, it has also been suggested that while selling shares to financial sector entities, the representative body or its related group should be able to own only up to a maximum of five percent of the total share capital of NEPSE. "There is a possibility that the sale of the full ownership of the Government of Nepal will lead to a situation where small investors' confidence in the market will not be maintained, the private sector will become a monopoly in the operation of the securities market, and self-regulation practices may be weakened, the strong financial basis that can be obtained from the government in the future will be weakened, and NEPSE will not be able to be used for national interest," the report says. "To prevent that situation from happening, partial ownership can be sold while maintaining partial share ownership of the government and government-owned entities. As per the above, when disinvesting government ownership, a structure can be adopted in which there will be at least one expert director from all groups except other groups." The report also suggests a share structure in which the government can partially and completely sell its shares in NEPSE. In which, while disinvesting with partial government ownership, strategic partners should own a maximum of 25 percent, ‘A’ class commercial banks (including banks that have taken ownership recently) and Employees Provident Funds should own a maximum of 35 percent, national-level development banks, life and non-life insurance companies should own a maximum of 15 percent, and others should own 0.61 percent.
Similarly, while disinvesting with full government ownership, strategic partners should own 25 percent, ‘A’ class commercial banks (including banks that have taken ownership recently) and Employees Provident Funds should own a maximum of 40 percent, national-level development banks, life and non-life insurance companies should own a maximum of 20 percent, others should own 0.61 percent, and the general public should own 15 percent.
The report also suggests restructuring the board of directors of NEPSE. ‘It seems that most of the directors are represented by the Government of Nepal or bodies under the Government of Nepal. "Having most directors represented by those bodies has its own negative aspects," the report says. "Therefore, it would be appropriate to restructure the board of directors of NEPSE so that there is a majority of independent expert directors." The report suggests that it would be appropriate to determine the qualifications of independent expert directors, the formation of a committee regarding the selection of directors, the formation of various committees for institutional good governance, and the determination of remuneration according to the performance of directors.
