Nepal's '10-Kitta' IPO Policy: A Critical Debate on Market Democratization and Investor Behavior

The Nepali capital market is currently embroiled in a significant debate surrounding the long-standing '10-kitta' policy for Initial Public Offering (IPO) allocations. This policy, which guarantees a minimum of 10 shares to every eligible applicant, has been a cornerstone of market democratization, yet it now faces scrutiny from high-level government officials who suggest it may be contributing to short-term investment behavior and market instability.

The discussion gained momentum after Mahesh Acharya, Joint Secretary at the Ministry of Finance, hinted during a parliamentary finance committee meeting that the '10-kitta' policy might encourage investors to offload shares immediately upon listing, thereby creating an excess supply in the secondary market. This assertion has sharply divided capital market experts, former regulators, and the investor community, prompting a critical re-evaluation of a policy that has profoundly shaped Nepal's investment landscape.

To fully grasp the implications of this debate, it's essential to look back at the pre-2074 BS (approximately 2017 AD) era. According to Dr. Rewat Bahadur Karki, former Chairman of the Nepal Securities Board (SEBON), the IPO allocation system prior to the '10-kitta' policy was highly inequitable and largely controlled by a select few. The 'pro-rata' system then in place heavily favored wealthier investors; an applicant applying for NPR 50,000 (500 kitta) might receive 30 shares, while someone applying for 100 kitta could end up empty-handed. Furthermore, a mandatory minimum application of NPR 5,000 (50 kitta) effectively excluded students, homemakers, and low-income laborers from participating in the capital market.

Dr. Karki credits the introduction of the '10-kitta' policy, alongside the C-ASBA system, with democratizing Nepal's capital market, extending its reach to remote villages. This policy laid the foundation for a dramatic increase in Demat accounts, soaring from 1.5 million to over 8 million. Today, a student in Mugu or a migrant worker in the Gulf can become a fractional owner of major hydropower projects or banks with an investment as modest as NPR 1,000, a testament to the inclusivity fostered by the '10-kitta' policy.

However, the Ministry of Finance, through Joint Secretary Mahesh Baral, argues that the '10-kitta' policy has failed to cultivate long-term investors. Baral contends that investors tend to sell their shares as soon as they are listed, leading to an unnecessary increase in market supply. This perspective, however, is met with strong opposition from market experts like Rabindra Bhattarai, who views it as an "attack on the poor." Bhattarai emphasizes that it is natural for ordinary citizens grappling with unemployment and poverty to seek immediate returns on their NPR 1,000 investment to meet pressing needs. He argues that expecting them to hold shares for the long term while their immediate needs are unmet is unrealistic. Instead, he suggests that if the government wishes to encourage long-term holding among small investors, it should introduce incentives such as tax breaks on holding or other financial instruments, rather than closing their entry point into the market.

Tara Prasad Phullal, President of the Investors Association, believes that the '10-kitta' policy is not the root cause of the market's problems. He points to deeper "structural inefficiencies" such as a low floating share percentage, weak regulatory oversight, the absence of intraday trading, and a general apathy towards market expansion. According to Phullal, diverting attention to the '10-kitta' policy while these fundamental issues persist is counterproductive.

Phullal offers several crucial recommendations for genuine market reform:

• Mandatory 40% IPO Issuance: Currently, companies issue only 10% of their shares to the public, retaining 90% with promoters. This limits floating shares and makes market manipulation (cornering) easier. Increasing the mandatory public issuance to at least 40% would enhance market transparency and liquidity.
• Student Quota: Allocating a portion of the quota currently reserved for mutual funds to students could foster financial literacy from a young age.
• Flexible Minimum Application: While maintaining the '10-kitta' policy, reducing the minimum application to 4-5 kitta could further broaden public participation.

Former SEBON Executive Director Neeraj Giri acknowledges that the '10-kitta' policy expanded the market but also highlights the risks associated with consistently issuing shares at a face value of NPR 100. He advocates for the effective implementation of a 'book-building' system, where share prices are determined based on a company's actual financial health. Giri believes that such a system would naturally resolve the debate over '10-kitta' or '50-kitta' allocations. He points to India's example, where book-building ensures investors commit based on company quality, not just the allure of a fixed NPR 100 share price that often triples upon listing in Nepal, fueling speculative interest.

Market insiders suggest that powerful "large investors" are actively lobbying the regulators and the Ministry to abolish the '10-kitta' policy. Their perceived motive is to secure larger allocations in IPOs and exert greater control over the market. Dr. Rewat Bahadur Karki, recalling his tenure, warns SEBON against succumbing to such pressures, noting that large investors opposed the policy even during its inception.

With over 8 million Demat accounts, the vast majority belonging to small investors, the abolition of the '10-kitta' policy risks transforming Nepal's capital market back into an exclusive club for the elite. The '10-kitta' policy is more than just a number; it represents the "inclusive democracy" of Nepal's capital market. Instead of targeting this policy, market experts suggest that the Ministry of Finance and SEBON should focus on broader reforms:

• Encourage Quality Issuers: Promote reputable and profitable companies to issue shares at a premium or through book-building to prevent "junk" companies from entering the market.
• Increase Public Float: Raise the public share issuance from 10% to at least 25-30%.
• Introduce New Instruments: Implement intraday trading, short selling, and other modern financial instruments to enhance market dynamism.
• Investor Education: Educate small investors on the importance of long-term shareholding.

These measures, experts argue, would build a more trustworthy and vibrant market without undermining the foundational inclusivity provided by the '10-kitta' policy.