Leveraging Assets: The Rules, Criteria, and Exclusions for Pledging Listed Shares and Trading on Margin

Nepal Rastra Bank (NRB) stipulates regulatory criteria governing the eligibility of listed companies whose equity securities may be pledged as collateral to secure credit facilities from banks and financial institutions.

As per requirement of Unified NRB Directives, 2082 under following circumstances, loans shall not be granted against the shares of listed institutions:

1. Institutions that have been declared problematic by the Bank/Financial Institution or that have failed to maintain the required capital adequacy ratio as prescribed by directives.
2. Institutions suffering from a negative net worth.
3. Institutions delisted by Nepal Stock Exchange Limited (NEPSE).
4. Institutions that have not conducted and completed the final audit for the previous fiscal year even within a year of completion of previous fiscal year.
5. Institutions that have incurred losses continuously for the last three fiscal years.
6. Institutions that have not completed period of one year from date of commencement of commercial operations.
7. Institutions that have not held an Annual General Meeting (AGM) for the last three years.
8. Institutions whose trading of shares has not been transacted for 250 days.

In accordance with the Unified Directives issued by Nepal Rastra Bank (NRB) to Banks and Financial Institutions, a thorough assessment was conducted using recent disclosures published on the Nepal Stock Exchange and individual company websites to identify ineligible listed companies. Below is a sector-by-sector breakdown of the assessment:

Commercial Bank: All companies listed under the Commercial Banking sector meet the eligibility criteria for loans against shares.

Development Bank: Among seventeen companies listed under Development banking sector, following two companies does not meet the criteria for availing loan against share:

Finance: Among fourteen companies listed under Finance sector, following one company does not meet the criteria for availing loan against share:

Hotel & Tourism: Among eight companies listed under Hotel & Tourism sector, following three companies does not meet the criteria for availing loan against share:

Hydropower: Among one hundred eleven companies listed under Hydropower sector, following thirty six companies does not meet the criteria for availing loan against share:

Investment: All companies listed under the Investment sector meet the eligibility criteria for loans against shares.

Life Insurance: Among fourteen companies listed under Life Insurance sector, following one company does not meet the criteria for availing loan against share:

Manufacturing & Processing: Among nineteen companies listed under Manufacturing & Processing sector, following nine companies does not meet the criteria for availing loan against share:

Micro Finance: Among fifty companies listed under Micro Finance sector, following nine companies does not meet the criteria for availing loan against share:

Non-Life Insurance: Among thirteen companies listed under Non-Life Finance sector, following one company does not meet the criteria for availing loan against share:

Others: Among nine companies listed under Others sector, following four companies does not meet the criteria for availing loan against share:

Trading: Among two companies listed under Trading sector, following one company does not meet the criteria for availing loan against share:

Notwithstanding the general criteria of identifying ineligible companies, Nepal Rastra Bank (NRB) mandates that Banks and Financial Institutions (BFIs) maintain their own internal roster of approved listed shares. Beyond satisfying standard regulatory criteria, shares must undergo a fundamental analysis evaluating metrics such as the Price-to-Earnings (P/E) Ratio, Price-to-Book (P/B) Value, Dividend Yield, and Dividend Payout Ratio. Consequently, BFIs may still reject certain listed companies for margin lending facilities even if they pass the baseline ineligibility screening.

As per the recent first hand reform launched by Securities Exchange Board of Nepal (SEBON) through Margin Trading Facility Directives, 2082, stockbrokers are now authorized to directly provide margin lending services to investors. Consequently, investors seeking margin trading facilities no longer need to depend on banks and financial institutions for margin loans.

To determine which listed companies qualify for margin trading, the directives establish the following eligibility benchmarks:

1. Having listed at least 5 million (25 Lakh) ordinary shares (excluding locked-in shares),
2. Net worth being equal to or greater than the paid-up capital,
3. Having made a net profit in at least two out of the last three years,
4. Having completed at least two years since listing following an Initial Public Offering (IPO)
   In line with above criteria, Nepal Stock Exchange has published eligible list of 123 listed companies on Chaitra 17, 2082. (Notice Link: nepalstock.com.np/api/nots/news/notice/fetchFiles/58b9968c2a4c721ddc2be46b327f1895.pdf)

According to the latest notice issued by NEPSE, a total of 123 companies across various sectors qualify for margin trading facilities under existing securities regulations:

• Banks & Financial Institution: All 19 commercial banks, 11 of 17 development banks, and 11 of 14 finance companies.
• Insurance: 12 of 14 life insurance companies, and 11 of 13 non-life insurance companies.
• Microfinance: 17 of 50 microfinance institutions
• Hydropower: 28 of 111 hydropower companies
• Investments: 6 of 7 investment companies.
• Hotel & Tourism: 3 of 8 companies.
• Manufacturing & Processing: 2 of 19 companies.
• Trading: 1 of 2 trading company
• Other Sectors: 2 of 9 companies.

All listed companies except explicitly listed in the notice dated Chaitra 17, 2082 shall not be eligible for availing margin trading facilities.

A comparison of the regulatory stances of Nepal Rastra Bank (NRB) and the Securities Board of Nepal (SEBON) reveals a notable divergence in approach when it comes to lending against shares.

NRB's provisions appear considerably more permissive on this front: banks and financial institutions (BFIs) are allowed to extend loans against shares of listed companies even before the mandatory three-year lock-in period following listing has expired, against shares of companies that have failed to hold their Annual General Meeting for three consecutive years, and against shares of companies that have posted net losses for three straight years.

Taken together, these allowances suggest that NRB's regulatory framework leaves considerably more room for risk than SEBON's stricter safeguards would otherwise permit raising questions about whether the two regulators' standards are adequately aligned to protect the broader financial system.

Article By: Anil Basnet