SEBON Unveils Sweeping Reforms: New Directives to Modernize Nepal's Capital Market and Enhance Investor Protection

The Nepal Securities Board (SEBON) has issued a comprehensive set of directives aimed at bolstering the integrity, transparency, and technological sophistication of the nation's capital market. These far-reaching instructions, leveraging the authority granted by Sub-section (1) of Section 84 of the Securities Act, 2063, are designed to safeguard investor interests and propel the market towards greater modernization. The directives target key stakeholders including the Nepal Stock Exchange (NEPSE), CDS and Clearing Limited (CDSCL), securities brokers, merchant bankers, and listed companies.

Key Directives for NEPSE: NEPSE, as the primary trading platform, faces a series of critical mandates. SEBON has instructed NEPSE to conduct an IT audit and VAPT (Vulnerability Assessment and Penetration Testing) of its Trading Management System (TMS) and submit a detailed report. Furthermore, NEPSE is tasked with identifying and resolving existing issues within the Nepal Online Trading System (NOTS) to enhance its efficiency and capabilities. A significant directive addresses the burgeoning interest in Artificial Intelligence (AI) based trading; SEBON has ordered a halt to AI-driven order entry until a thorough study of international practices and Nepal's specific needs is completed, with investors to be duly informed. To improve accessibility, NEPSE must facilitate second-market trading through mobile applications and ensure the effective implementation of After Market Orders (AMO). The integration of C-KYC (Centralized Know Your Customer) with TMS is also a priority.

In a move to offer more nuanced market insights, NEPSE has been directed to develop new indices, such as NEPSE 30 and NEPSE High Cap, and to calculate existing indices based on free-float shares, reflecting actual tradable shares more accurately. For investor convenience, SEBON has mandated the implementation of 'Auto EDIS' (Electronic Debit Instruction Slip) through API integration between CDSCL and TMS. This crucial step is expected to eliminate the current manual process for investors to confirm share sales, streamlining the settlement cycle. Additionally, CDSCL is required to provide instant 'push notifications' via mobile for important updates such as IPO allotments, bonus and rights share credits, settlement confirmations, and demat debits. Addressing data discrepancies, NEPSE must establish real-time reconciliation between DP (Depository Participant) holdings displayed in TMS and actual holdings recorded by CDSCL. A study and report on resolving issues related to 'fraction share' trading have also been requested.

Directives for Securities Brokers: Securities brokers are now subject to stricter regulations concerning client funds. SEBON has mandated the rigorous implementation of separate bank accounts for client funds and the broker's own funds, enhancing financial security and transparency. To improve investor grievance redressal, all brokerage firms must establish a dedicated 'Grievance Resolution Unit' and submit monthly reports to SEBON within three working days of the month's end. Brokers, in conjunction with NEPSE, are also reminded to ensure the effective and timely disbursement of funds to investors within the T+2 settlement period.

Directives for Merchant Bankers: Merchant bankers, pivotal to the primary market, have been instructed to ensure there are no conflicts of interest during the issuance of securities. Furthermore, when submitting applications for new IPOs, the inclusion of an audited financial report has been made mandatory, reinforcing due diligence and investor confidence.

Directives for Listed Companies: Listed companies will see new rules for major shareholders. Any fundamental shareholder holding 5% or more of a company's shares must now inform the respective company at least 15 days prior to selling their shares. The company, in turn, is obligated to publicly disclose this information through NEPSE, promoting greater transparency and preventing sudden market shocks from large block trades.

Directives for Collective Investment Schemes (Mutual Funds): Scheme managers of mutual funds are now required to maintain a higher level of transparency. They must publish their approved offer documents, daily buy and repurchase units, Net Asset Value (NAV), and the total number of unitholders prominently on their official websites.

Promoting Financial Literacy: In a broader effort to foster a more informed investor base, SEBON has directed all market participants—NEPSE, CDSCL, brokers, and merchant bankers—to conduct at least one financial literacy program per month. These initiatives are expected to educate potential and existing investors, thereby strengthening market participation and understanding.

SEBON believes that these comprehensive measures will significantly enhance the transparency and efficiency of the Nepali capital market, ultimately boosting investor confidence and contributing to its robust development. The directives underscore the regulator's commitment to creating a fair, orderly, and technologically advanced trading environment for all participants.