June 5: The finance committee has recently endorsed the bill that has been formulated in order to amend and amalgamate the policies of BFIs. Now if the bill gets endorsed by Ministers’ Cabinet as it is, then 107 BFIs are eligible to convert their promoters’ share into general shares.

The bill has set up a mechanism where BFIs can convert their promoters’ shares into general shares after completing 7 years of their operation under the approval of NRB.  Under the mechanism, companies that came into operation before mid-April 2009 can convert their promoters’ shares into general shares at their will.

Based on the mechanism, 22 commercial banks, 39 development banks, 40 finance companies can convert their promoters’ shares into general shares.  However, the mechanism is not mandatory and companies are required to take approvals from NRB for that matter. “Therefore, the possibilities for all companies cancelling classification of shares are minimum,” say stakeholders.

“There is no requirement for classification of shares as promoters’ and general. But there is a big populace in the market who wants to stay as promoters.  Therefore, it can be predicted that they might not want to end the classification on all shares,” says Mukti Nath Shrestha, Executive Director of Securities Board of Nepal (SEBON). He opined that there is no pressure to convert the shares, as the topic is optional.

The possibility of convert is minimal, as the market price of promoters’ share is half in compare to the market price of general shares at present. The market price differentiation will further raise the market price of general shares if the convert take place. But why the promoters do not want to transfer their shares?

“Most of the companies have to search the investors themselves while selling the extra promoters’ shares beyond the limitation. When they search the investors by themselves they can quote the different rate in NEPSE other than the real rate.” It will save capital gain tax for the investors. Thus most of them find ease on transacting on the category. Facts also suggest that the existing differentiate market price of promoters’ share and general shares is motivated by the wills of promoters.

“There is no separate regulation regarding price differentiation. The system starts with Finance Minister’s direction to provide low price for promoters share in compare to general in the year 2007 on the request of the promoters. Additionally, regulatory mechanism to obtain NRB approval while selling promoters’ share above 1 percent, difficulty in searching buyer shareholders etc have prompted buyers to bargain on the price which have also resulted in price differentiation.  

In the other hand, buyers of promoters’ share also gain from the transaction. Shareholders who enter companies with promoters’ shares get easy representation access to board of directors (BOD) of the companies. Additionally, purchase of promoters’ shares also gives the shareholders an authority to influence decisions of BOD.  Big investors are keen to enter the companies with promoters’ share as it also eases the representation process to act against the existing directors of the companies.