Controversy Erupts Over SEBON's 15-Day Pre-Disclosure Rule for Promoter Share Sales

The Nepal Stock Exchange (NEPSE) is currently grappling with a significant regulatory debate following the Securities Board of Nepal (SEBON)'s proposal for a stringent 15-day pre-disclosure requirement for promoter and basic shareholders intending to sell their shares. This new framework, outlined in SEBON's 'Concept Paper, 2083' released on October 7th, aims to enhance market transparency and curb insider trading. However, it has instead ignited widespread discontent among key stakeholders, including the Bank and Financial Institution Confederation Nepal (CIBFIN), prominent investors, and market analysts. Critics argue that the proposed regulation could stifle market liquidity, discourage investment, and create an uneven playing field.

SEBON's concept paper defends the existing provision that mandates basic shareholders of listed companies to issue a public notice through NEPSE 15 days prior to selling 5% or more of their holdings. Beyond this, the board has proposed a comprehensive four-tier regulatory framework designed to monitor and regulate such transactions more closely. This framework includes:

1. Regulatory Notification: Advance registration of information with NEPSE and SEBON systems.
2. Public Disclosure: Public announcement of potential sales through NEPSE.
3. Automated Surveillance: Automatic matching between declared sales and actual transaction data.
4. Post-Trade Confirmation: Public disclosure of the actual number, price, date, and remaining share ownership after the sale is completed.

SEBON asserts that these measures are crucial for ensuring information parity, controlling insider trading, and enabling better forecasting of potential supply in the market. Paradoxically, the same concept paper, in clauses 11 and 16, acknowledges that a “15-day public pre-disclosure period is relatively long” when compared to international practices. The paper itself cites examples from countries like India, the United States, the United Kingdom, Singapore, and Malaysia, where post-trade disclosure within two to three days is the norm. This internal contradiction has fueled much of the criticism.

The Bank and Financial Institution Confederation Nepal (CIBFIN) has been vocal in its opposition. During a recent event in Kathmandu, Rajesh Upadhyay, Acting Chairman of CIBFIN, stated that compelling basic shareholders to provide 15 days' advance notice for share sales unnecessarily complicates the market. He emphasized that while a 15-day or one-month notice might not seem substantial in isolation, the policy direction should be towards easing, not increasing, the burden on investors. Upadhyay highlighted the plight of promoter shareholders who, despite investing in banks and financial institutions for years, often struggle to realize adequate returns and face legal hurdles when attempting to exit their investments. He urged regulators to foster a more conducive environment for share trading.

Vishnu Prasad Bashyal, a respected technical and fundamental analyst in the capital market, has openly challenged SEBON's concept paper on social media, accusing it of attempting to justify a flawed policy. Bashyal questioned the rationale behind the 15-day period, asking why it isn't three days, five days, or even one trading day, or why post-trade disclosure within two days isn't sufficient. He argued that publicizing every potential sale 15 days in advance creates artificial selling pressure on share prices, leading to market distortions. “Creating artificial pressure on prices by publicly disclosing every potential sale 15 days in advance is not transparency. Transparency and market distortion are not the same thing,” Bashyal wrote, advocating for regulators to acknowledge mistakes and implement improvements rather than defending erroneous policies.

Veteran investor Ambika Prasad Paudel echoed similar sentiments, using social media to satirically critique the restrictions placed on promoter shareholders. He questioned the fairness of policies that restrict promoters from selling their shares, implicitly asking if those who advocate for such restrictions would accept similar limitations on their own market-bought shares. Paudel's remarks underscore the fundamental principle that regulators should not adopt discriminatory policies that infringe upon investors' property rights, liquidity, and freedom, advocating for equal treatment for all market participants.

Stakeholders generally agree that while SEBON's objective of controlling insider trading through the 15-day pre-disclosure and post-confirmation system is commendable, its implementation method has inadvertently fostered unnecessary fear and liquidity contraction in the market. Experts conclude that ignoring the 'Post-Trade Immediate Disclosure' model adopted by international markets in favor of a 15-day advance declaration policy is not market-friendly. The ongoing debate highlights the critical need for a balanced regulatory approach that promotes transparency without hindering market efficiency and investor confidence, ensuring the sustainable growth of Nepal's capital market.