In a decision that will be cited for years to come, the Supreme Court of Nepal recently waded into the complex waters of capital market regulation. The case (080-WO-0476), initiated by Advocate Bhimsen Rayamajhi, challenged the right of Himalayan Reinsurance Ltd to issue shares at a premium—charging the public Rs 206 per share while founders paid only the Rs 100 face value.
While the court ultimately allowed the IPO to stand because the shares had already been allotted, its reasoning has exposed a worrying friction between legal literalism and the ‘financial spirit’ of modern markets.
The petitioner’s argument was rooted in fairness. Drawing on Articles 16, 17, 18, 20, 25, 46, and 133 of the Constitution, the challenge argued that charging the public more than the founders was discriminatory and harmful to common investors.
The court’s ruling of bench of justices Manoj Kumar Sharma and Shrikanta Paudel on April 28 pivoted on Section 45(5) of the Insurance Act, 2079. This section mandates that companies must collect ‘100 percent of the face value’ during an IPO. In a move that surprised many financial analysts, the court designated this as a ‘Special Law’. In legal theory, a special law overrides general ones like the Company Act or the Securities Act, which explicitly allow premium pricing for successful companies. By sticking to the letter of the Insurance Act, the court effectively ruled that for insurance companies, the face value is a ceiling, not just a floor.
The most stinging critique of the ruling, found within the sources, is that it may be based on a technical misunderstanding of ‘Call Money’. Historically, companies would collect only a portion of the share price upfront (e.g., 25 percent) and ‘call’ for the rest later. Section 45(5) was likely intended to ensure that 100 percent of the value is paid upfront to prevent unstable capital structures.
By interpreting ‘100 percent of face value’ as a ban on premiums, the court has ignored the reality that Himalayan Reinsurance had met every modern financial benchmark, including an authorized capital of Rs 21bn and a paid-up capital of Rs 7bn, an ‘A-’ credit rating from ICRA Nepal, and detailed Due Diligence Audits (DDA) by independent experts.
Under international standards like Nepal Financial Reporting Standards (NFRS) and Generally Accepted Accounting Principles (GAAP), a share premium is not ‘found money’ for the company to blow; it is legally required to be held in a Share Premium Reserve Account and cannot be paid out as cash dividends.
Perhaps the most significant part of the judgment is the court’s blunt criticism of the Securities Board of Nepal (SEBON) and the Nepal Insurance Authority. The court ruled that these bodies failed in their ‘legal responsibility’ by approving the premium in the first place, accusing them of ignoring the ‘Special Law’ in favour of general securities regulations.
To remedy this, the court issued a directive for these regulators to coordinate and ensure that every rupee of the premium is locked in a ‘Jageda Kosh’ (Reserve Fund). While this ensures the money is safe, it signals a lack of judicial confidence in the very institutions meant to govern the markets.
The sources argue that this case is a ‘living example’ of why Nepal needs a Specialised Commercial Bench or a Securities Tribunal. Corporate finance is a language of its own. When judges interpret these laws through a purely civil lens, it creates ‘unimaginable examples’ of legal confusion that can stifle both domestic growth and foreign investment.
If Nepal wants a thriving capital market, its legal interpretations must evolve alongside its financial ones. Protecting investors is vital, but that protection should not come at the expense of the basic economic logic that allows companies to grow. Until the law is clarified, the ‘premium’ on investing in Nepal remains high—not just in terms of rupees, but in terms of legal uncertainty.
The author is a member of the Supreme Court Bar and has been practicing corporate law for around three decades
