Insider trading taints Nepal capital market

The heads of the Nepal Stock Exchange (Nepse) and Securities Board of Nepal (SEBON) as well brokers and industrialists have been found to have profited from insider training and conflict of interest, eroding the public’s trust in the country’s stock market.  

Documents show that they were engaged in ‘front running’ in contravention of existing rules governing the role of regulators and brokers in stock valuation and transactions.

An investigation by Himal Khabar this week found Nepse CEO Chandra Singh Saud and SEBON Chair Bhishma Raj Dhungana bought shares for family members in Sarbottam Cement at far lower prices just before its Initial Public offering (IPO).

The board of directors of Sarbottam Cement decided to sell 6 million shares in the company through a book building process. The shares were valued at Rs750 per unit to raise Rs4.65 billion, of which only 12.9% were included in the initial public offering. 

However, many of the shares were sold pre-IPO for less than Rs250 per unit even before the public offering, and others are believed to have been given for free as ‘presents’ to important people. Benefiting were close family members of SEBON’s Chair Dhungana, Nepse CEO Saud, as well as Global IME Capital which was handling Sarbottam’s IPO.

Says share market expert Rabindra Bhattarai: “This is a clear case of an attempt by insiders to unethically influence the market price of a company offering premium shares.”

Global IME Capital’s parent company Global IME Bank is headed by Chandra Dhakal, who is vice-chair of FNCCI and is also a member of SEBON. Dhakal’s brother has 30% share in an investment company that bought some of the shares. Chandra Dhakal therefore had a conflict of interest in being in a position to be the regulator in the sale of investment vehicles in a company that his family had invested in. 

Documents show that Saud and Dhungana also used their positions to leverage cheap purchases of the shares in the cement company, while Sarbottam benefited by getting permission to enter the share market, illegally influencing the regulators’ decision-making. In the eyes of the law, this is equivalent to corruption and considered a crime. 

“For a CEO of the Stock Exchange or its employees to use information about an IPO to personally buy shares is a direct and serious conflict of interest,” explains capital market expert Mukti Aryal. “Buying shares in a company that is going to be traded on its own platform opens up the possibility of share price manipulation. In a case like this the SEBON official has to declare a conflict of interest and step down.”

Front running is a form of insider trading where those with knowledge of a company’s share value use it to make a personal profit at the expense of the public. 

For example, it is ‘front running’ when a stockbroker receives customer orders to purchase a large stock in a company, but instead speculates the value of the shares and buys or sells off shares for themselves accordingly. Such actions are not just unethical, but can even be considered a financial crime. 

Nepal’s Securities Act 2007 Clause 91 codifies into law measures against front running, prohibiting SEBON staff from divulging and profiting off any inside information received by their position. Regulatory authorities are also not allowed to be in contact with company executives, founders and managers or exchange any benefits with them. 

Nepse CEO Saud told Himal Khabar he did nothing wrong, and admitted that he bought shares in Sarbottam at Rs250 per unit in the name of his wife, Sushila Kumari Bohara, but only after the cement company’s book building process had started. 

“It is only prohibited to buy and sell in the secondary market, there are no restrictions on buying shares in a company’s initial public offering,” Aryal told the magazine.

However, Saud has been accused of purchasing the shares at a price lower than the company’s book-building, or share price evaluation. 

Nepse CEO Chandra Singh Saud.

Companies that are going public must disclose all operations to regulators to ensure market transparency, but in no way are regulator officials, investment executives, brokers, company employees and others with an inside track allowed to enrich themselves using the company’s open books. 

Similarly, the investigation showed that SEBON chair Bhisma Raj Dhungana had also bought 11,992 shares in the name of his US-based daughter, Rebika Dhungana, in Sarbottam Cement before its book building process had started. 

SEBON’s Code of Ethics bars the board’s members and chair and their families from engaging in any transaction from which they can financially benefit.

“Yes, my daughter sent me money from the United States to buy the shares, and yes, they are her shares,” Dhungana admitted. “Just because I am the chair of SEBON does not mean the law bars my married daughter from buying shares from any company she wants.”

Dhungana was formerly with Nepal Rastra Bank, and is believed to have been nominated for the four-year term in SEBON at the recommendation of President Bidya Devi Bhandari.

SEBON Chair Bhishma Raj Dhungana.

An expert in share market regulations told Himal Khabar: “This is a straightforward case of insider trading. There is no question about it.”

Sarbottam Cement had signed an agreement with Global IME Capital to handle the IPO in March in the presence of SEBON officials, but the process has been delayed till later this month. 

Nepal’s manufacturing companies, especially in the construction and hydropower sector are currently riding a wave of market confidence. Another compnay, Shivam Cement, recently went public clocking a similarly strong stock market performance. 

The revelation of insider trading has been greeted by outrage on Nepal’s social media, and is likely to erode people’s growing trust in the stock exchange, with many commentators and financial analysts equating the secondary market with skulduggery, insider trading and outright theft.

‘Are board members allowing suspicious companies to release shares under the temptation of illicit rewards?’ asked one social media post. Another went: ‘Is the share distribution process transparent?’ Yet another said: ‘Have finance bosses, chiefs and sales executives rigged the process to earn favourable shares for themselves?’ 

The share market had been anticipating a surge, riding a wave of investment interest of the Nepali public in the manufacturing and construction sectors. But the reports of insider trading confirm the public’s suspicions of hanky-panky, and are expected to dampen the stock market.  

Moreover, moving forward, companies wishing to list their IPOs via book building will be cautious of possible behind-the-scenes dealings.

The irregularity in Sarbottam Cement share offering is not the first of its kind, with the Securities Act 2007 violated previously.  In 2014, investors at Citizens Investment and Employees Provident Funds were caught exchanging investment with the Upper Tama Kosi Hydropower with shares for themselves in return. The regulations were subsequently overhauled and loopholes plugged.

The Upper Tama Kosi and Sarbottam Cement cases are similar in the sense that they were both examples of graft, wherein two parties are believed to have exchanged confidential information for personal profit. 

Given the impunity that is rife in Nepal’s political and business spheres, the Sarbottam issue will further damage the reputation, trust and transparency of the share market, hurting an already moribund economy.

Stock exchange legal expert Amrit Kharel is clear about the rules: “Three generations of the family members of a person with inside information about an initial public offering are barred from benefiting from any transaction, It is not just unethical, it is considered insider trading. And if any member of staff of SEBON is found to be violating this, they are liable to prosecution.”

Links to Himal Khabar series on this subject:

Translated by Kaustubh Dhital