Pokhara, 24 September | Banks and financial institutions will now be allowed to sell shares and debentures of companies listed on the securities market after holding them for at least 45 days. Nepal Rastra Bank has reduced the minimum holding period from the previous six months through a directive issued on Thursday. The new provision allows banks and financial institutions to make investments with the possibility of selling the securities after more than 45 days, while continuing to restrict purely short-term investment arrangements.
Under the new directive, banks and financial institutions may invest in shares and debentures of organized institutions already listed on the securities market only for a period exceeding 45 days. The central bank has also prohibited short-term investments in shares and debentures of organized institutions through any other arrangement. Before implementing the provision, banks and financial institutions must have their investment policies and procedures approved by their respective boards of directors.
The policies must cover investments in government securities, Nepal Rastra Bank bonds, and shares and debentures of organized institutions. The central bank has instructed financial institutions to develop procedures aimed at reducing speculative risk and ensure that such procedures are approved by their boards.
The investment policy and procedures must clearly define the objectives and strategies of investment, eligible shares, debentures and other financial instruments, and the classification of investment instruments into banking book and trading book. They must also identify acceptable and unacceptable investments, eligible counterparties, and minimum and expected holding periods according to the type of investment instrument.
The directive also requires banks to establish mechanisms for identifying and managing conflicts of interest in investment decisions and transactions. Such mechanisms must address potential conflicts involving subsidiaries, shareholders with significant ownership and risk-taking parties. Banks must also specify procedures for monitoring, controlling and reporting investment activities, along with clear approval processes and delegated authority for investment decisions. The limits applicable to designated officials who conduct investment transactions must also be defined.
Investment policies must additionally address trading strategies, risk-bearing capacity and limits, profit-taking and loss-cutting thresholds, investment sectors and sectoral limits, and the treatment of securities in the relevant trading or investment books. Banks and financial institutions will also be required to use stress testing and other appropriate methods, procedures and models to measure and manage market risks.
The new directive requires financial institutions to identify, measure, monitor, manage, control and report market risk, liquidity risk and other risks arising from their investments. They must also establish arrangements for regularly assessing the internal risks of issuers of financial instruments. Management reports and breach reports will also have to be prepared as part of the reporting framework.
The change comes as the government has been implementing a 21-point share market reform programme following a prolonged decline in the stock market. The central bank’s decision to reduce the minimum holding period is expected to provide banks and financial institutions with greater flexibility in managing their securities investments, while the directive continues to emphasize risk management, internal controls and investment limits.
The existing integrated directive of Nepal Rastra Bank sets limits on how much banks and financial institutions can invest in securities. A bank may invest no more than 10 percent of its primary capital in the shares, debentures or collective investment funds of a single organized institution. The total investment in shares, debentures or collective investment funds of all organized institutions cannot exceed 30 percent of the institution’s primary capital.
Similarly, investment in the shares and debentures of an organized institution is limited to up to 10 percent of that institution’s paid-up capital. If a bank or financial institution has invested more than the prescribed limit at the time of investment, the excess amount must be deducted from primary capital when maintaining the capital fund.
For companies in which a bank or financial institution has a financial interest, the total investment may reach up to 20 percent of its primary capital under the existing framework. However, the total amount invested in shares and debentures of organized institutions in which the bank has a financial interest must be deducted from primary capital when calculating the capital fund. Thus, while the new directive shortens the minimum holding period, banks and financial institutions remain subject to established investment ceilings and capital adequacy requirements.
