ILLUSTRATION: MARK LONG
ASK ANYONE who has tried to sell promoter shares in a Nepali bank, and you’ll hear the same complaint. Global IME Bank’s secretary, Bishnu Baskota, lays out the process like a man reciting a particularly tedious recipe: first, a mandatory 35-day public notice giving existing promoters the right of first refusal. If nobody bites, another 35 days advertising to ordinary investors. Then the board has to sign off, and only after that does the Nepal Rastra Bank (NRB) give its blessing. Himalayan Bank officials say the whole thing commonly eats three months or more.
So when the central bank announced last November a review of this entire process after years of complaints that it was choking off market liquidity, the obvious conclusion was that things were about to get easier. They are, in one sense. But not in the sense that matters most to regulators right now.
What the NRB is loosening is pure red tape: the duplicate notice periods and the months of bureaucracy separating a willing seller from a willing buyer. That part of the system really was overkill, and trimming it should make bank shares easier to trade without touching who is actually allowed to own them. The part getting tighter sits underneath all that paperwork: in how promoter shares get tracked and who can move them around.
There is a reason promoter shares get special treatment under Nepali banking law. Promoter groups are required to hold at least 51% of most banks, and they cannot sell or pledge that stake for five years after the bank opens its doors.
Directors, chief executives, auditors and company secretaries face something even stricter: a flat ban on trading their own bank’s shares while in office, extending a full year after they leave. The rationale is that people who run a bank shouldn’t trade on inside knowledge, and the founders should have skin in the game long enough to actually care how the institution is run.
Here is where it gets messy. Historically, promoter shares and ordinary public shares have carried the exact same ISIN (International Securities Identification Number)—the unique digital fingerprint used in Nepal’s depository system. While locked-in promoter shares are supposed to be “flagged” and blocked on the back-end, system updates or corporate bonus share distributions can cause these flags to slip.
In practice, a locked-in promoter stake can get quietly folded into the freely traded public float and sold off without anyone noticing.
To shut this loophole, the Securities Board of Nepal (SEBON), the market watchdog, has drafted directives to mandate a strict dual-ISIN system. By giving promoter shares their own entirely separate identification number, blending them with public shares becomes virtually impossible. The directive has faced pushback from private sector groups worried about market sentiment, but the regulatory intent is obvious: stop insiders from passing off restricted shares as ordinary ones.
None of this is happening in a vacuum. A sweeping Asset Quality Review (AQR)—an independent, deep-dive audit commissioned by the NRB into Nepal’s ten biggest commercial banks—found their real bad-loan ratio sitting at an adjusted 7.6%. That is significantly higher than the 5.6% those same banks had been reporting in their own filings.
The central bank’s report had a name for the gap: evergreening, the practice of rolling over bad debt or issuing new loans just to pay off old defaults instead of admitting a loan has gone bad.
Furthermore, bank ownership in Nepal is heavily concentrated among the same massive family conglomerates now turning up in unrelated corporate governance crises. For example, recent money-laundering investigations by the Department of Money Laundering Investigation into major industrial conglomerates (like the Shanker Group and its subsidiary, Jagdamba Steel) have exposed just how deeply intertwined corporate borrowing and bank ownership really are.
When the people running a bank’s lending decisions also happen to be its biggest shareholders, and they possess the ability to shuffle shares around without backend transparency, the bad-loan problem and the ownership problem start feeding each other.
This is a sorting job. Genuine transfers between consenting buyers and sellers should move faster, and the NRB is right to clear the bureaucratic clutter. But transfers designed to obscure who actually controls a bank—or to let insiders quietly cash out of positions tied to loans they approved themselves—are becoming far harder to pull off. Regulators have realized that transaction speed and corporate secrecy are two entirely different problems, and it is the secrecy that is keeping the financial sector up at night. ■
