A new bill on Bank and Financial Institution Act (Bafia) has made a provision that the promoter shareholders of Banks and Financial Institutions (BFIs) can convert their shares into ordinary shares and trade them in the secondary market.

Clause 11 of section three of the bill, under discussion at Parliament, states that promoters of the BFIs can offload their shares in the secondary market after 10 years of establishment of the institution.  

Once Parliament endorses the bill, up to 49 percent shares of the BFIs that have completed 10 years of operation can be traded in the secondary market.  The bill has, however, put forth some conditions for the share conversion. Such conversion should be done in such a way that it does not have negative impact on the capital market, banking industry and overall financial sector. Similarly, promoters have to get an approval from the Nepal Rastra Bank (NRB) before offloading their shares in the capital market.  

Regulators, capital market analysts and bankers are positive about the provision, saying that the provision could help stabilise the capital market and banking industry.

“This is ideally a correct move as shares of one company should not get different treatment,” said Upendra Poudel, president of the Nepal Bankers’ Association. “It is the universal practice.”

The promoters have long been complaining that despite making significant investment, they have failed to enjoy same facility that ordinary shareholders do.

Officials at the central bank also believe that allowing promoter to sell their holding through the secondary market could make way for professional people to enter into the banking business. “It will ensure a larger public participation in the BFI operation which will in turn be instrumental in installing corporate governance in the BFIs,” said a senior NRB official. “The hiring of top management will be based on merit instead of promoter’s interest which ultimately contributes to prudent banking practice.”

At present, promoters of the BFIs are blamed for imposing their decisions on top executives, resulting in various anomalies in the industry.

However, there are also concerns that a massive inflow of stocks in the secondary market could lead to downturn of stock market. The value of ordinary share is almost double the promoter’s share; there is a possibility that a large volume of shares can be offloaded in the market in no time.

But Rabindra Bhattarai, capital market analyst, said even if the capital market is flooded with shares, it would not affect the market negatively as people would be interested to buy shares of banking institutions. “Initially, the share price might go down but they will pick up based on the returns they provide,” said Bhattarai. “This will make the capital market more efficient.”

Stock investors, however, are skeptic about the provision in the bill as they are worried that offloading the bulk of shares in exchange could have negative impact. “NRB must be vigilant while allowing BFI promoters to convert their shares,” said Aatma Ram Ghimire, chairman of the Nepal Investment Forum.