Supreme Court Orders Separate Reserve Fund for Premium Share Proceeds in Himalayan Reinsurance Case

The Supreme Court has directed that amounts collected above the face value of shares issued at a premium be kept separately in a dedicated reserve fund, citing the need to ensure compliance with the law and protect investors’ interests.

The directive was issued while deciding a writ petition related to the initial public offering (IPO) of Himalayan Reinsurance Limited (HRL), which had issued shares to the general public at a premium price.

A joint bench of Justices Dr Manoj Kumar Sharma and Shree Kanta Paudel ruled that the responsibility of regulatory authorities does not end with merely granting permission to issue shares at a premium.

The Supreme Court stated that regulatory bodies must thoroughly examine the prospectus and other documents submitted by an issuing company before approving a premium-priced share issue.

In the case of Himalayan Reinsurance, the court noted that regulators were required to ensure that the interests of investors were protected and that all legal requirements were properly fulfilled before approving.

The ruling has emphasised that the Nepal Insurance Authority and the Securities Board of Nepal (SEBON) must exercise greater diligence when approving premium-priced share issues in the future.

The court has also directed the authorities not to allow the issuance of shares at premium prices in violation of existing laws.

The Supreme Court has issued a directive to the Nepal Insurance Authority, SEBON and Himalayan Reinsurance to coordinate and establish an appropriate mechanism for keeping the amount collected above the face value of shares in a separate reserve fund.

Under the court’s interpretation, the amount collected above the face value of shares should not be treated as ordinary income that can be freely distributed or spent by the company.

In simple terms, Himalayan Reinsurance issued shares with a face value of NPR 100 at NPR 206 per share, including a premium of NPR 106. The court’s directive means that the additional amount collected above the face value must be managed separately in accordance with the applicable legal provisions.

The court has directed the concerned regulators to coordinate and make necessary arrangements for the management of such premium proceeds.

The provisions of the Companies Act, 2063, and the Insurance Act, 2079, have been considered in relation to the management and use of premium proceeds. The ruling indicates that a clear regulatory framework is required to determine how such funds should be held and under what circumstances they may be utilised.

Although the Supreme Court issued important directives to the regulators, it did not invalidate Himalayan Reinsurance’s IPO.

The court dismissed the writ petition filed against the company’s premium-priced share issue, concluding that there was no sufficient basis to cancel the share issuance and allotment process.

The court also considered the fact that the IPO and share allotment had already been completed while the writ petition was under consideration. Therefore, it found no justification for cancelling the completed issuance and allotment process.

The ruling noted that Himalayan Reinsurance had fulfilled the required criteria for issuing shares at a premium.

According to the judgment, the company had remained profitable for the previous three consecutive financial years, its net worth per share was higher than its paid-up capital, and it had fulfilled relevant requirements, including credit-rating criteria.

The court also interpreted the provisions of the Insurance Act, 2079, alongside the Companies Act, 2063, and the Securities Registration and Issue Regulations, 2073.

While the Insurance Act requires companies to call for 100 percent of the face value when inviting the public to purchase shares, company and securities laws allow eligible institutions to issue shares at a price higher than their face value, subject to the fulfilment of prescribed conditions.

The Companies Act defines shares sold above their face value as premium shares, while the Securities Registration and Issue Regulations specify the conditions that an institution must fulfil to issue shares at a premium.

The Supreme Court’s ruling has broader implications for premium-priced share issues in Nepal’s capital market.

Although the court did not cancel Himalayan Reinsurance’s IPO, it has clearly highlighted the responsibility of regulatory authorities to conduct detailed scrutiny of a company’s financial condition, prospectus, legal basis and other relevant documents before approving.

The ruling has also stressed that regulatory approval should not weaken corporate governance or undermine investor confidence in the securities market.

The court has effectively directed the Nepal Insurance Authority and SEBON to ensure greater transparency and stronger regulatory oversight in future premium share issues.

The decision is expected to influence how premium proceeds are managed by companies and how regulators coordinate to protect investors and ensure that funds collected above the face value of shares are used in accordance with the law.