The government has initiated legal reforms to help small and medium-sized enterprises (SMEs) access the capital market. As part of this effort, it is preparing to introduce the Securities Issuance and Transactions of Small and Medium Enterprises Regulation, 2081. This proposed regulation, a draft of which was received by New Business Age, has been approved by the Ministry of Finance and forwarded to the Office of the Prime Minister and Council of Ministers for final approval.

Narayan Prasad Risal, joint secretary at the Ministry of Finance, confirmed that the draft regulation has been submitted to the Council of Ministers and will take effect once approved.

The Securities Board of Nepal (SEBON) submitted the regulation to the Ministry of Finance on May 21, 2023.

Dr. Navaraj Adhikari, SEBON's Executive Director and Spokesperson, explained that this regulation will introduce a dedicated SME platform, allowing these companies to attract investments. He noted concerns about the current NEPSE setup, where companies of all sizes trade on the same platform. Under the new regulation, companies will be eligible to apply for an initial public offering (IPO) for a maximum paid-up capital of up to Rs 250 million.

The Nepal Stock Exchange (NEPSE) welcomed the proposed regulation. NEPSE's Information Officer, Murahari Parajuli, expressed optimism, stating that the SME platform would streamline capital-raising for SMEs. Parajuli added that NEPSE will adjust its systems to align with these new provisions.

According to the proposal, companies listed on the SME platform can have a maximum paid-up capital of Rs 250 million after their IPO issuance. Public issuance must comprise between 30% and 49% of the company's capital, with a face value of Rs 100 per share. Additionally, shares offered to the general public will be subject to a three-year lock-in period, while those owned by private equity, venture capital, and other similar entities will have a one-year lock-in period. Although a credit rating is optional for SMEs issuing securities, SEBON may require one if deemed necessary.

Public applications for securities will remain open for at least two working days, with an option to extend up to 15 days if all shares are not sold in the initial period. After applications close, shares must be distributed within 15 days, ensuring each applicant receives at least 150 shares.

The regulation also allows SMEs to issue securities at a premium if they have shown profitability over the past three years, maintain a net worth per share above the paid-up capital, and have achieved a favorable credit rating.

These reforms aim to create new financing opportunities for Nepal’s SMEs, enhancing their ability to raise funds through the capital market and contributing to economic growth.

Key Provisions of the Proposed Regulation:

• Companies' paid-up capital post-IPO should not exceed Rs 250 million, though the board may adjust this limit based on market conditions and SME demand.
• Companies must complete at least one financial year as a public entity before issuing IPO.
• Public issues must represent 30% to 49% of the issued capital.
• The face value per share will be Rs 100.
• Shares held by private equity and similar entities will have a one-year lock-in period, while ordinary shares will have a three-year lock-in.
• Investors must apply for a minimum of 150 shares, with allotments ensuring each applicant receives at least this number.
• SMEs may issue rights shares to increase capital and can offer shares at a premium if they have shown profitability over the past three years, maintain a net worth per share above the paid-up capital, and hold a favorable credit rating.
• All securities for public offering must be fully guaranteed, and founders' capital commitments must be fully paid.