NRB directives to encourage genuine investors

Nepal Rastra Bank (NRB), the central bank of the country, has taken a number of policy decisions to check financial institutions' engagements in manipulation of the share market and to develop a healthy capital market by encouraging genuine investors.

Talking to the media, acting governor of NRB Krishna Bahadur Manandhar said that the central bank recently issued two directives to all licensed financial institutions, asking the financial institutions to maintain capital adequacy ratio (CAR) on a monthly basis and introducing a provision of penalty in case an institution crosses its resource mobilization limit.

Manadhar said that the central bank recently amended its earlier provision of allowing financial institutions to maintain the CAR on a quarterly basis. "As per the new directives, financial institutions are required to maintain the ratio on a monthly basis and will be barred from distributing dividends and bonus shares if they fail to maintain the ratio even in a single month of a fiscal year," he said.

The main purpose of the direction is to plug the huge flow of capital from the financial institution to share subscriptions during initial public offerings (IPOs). Before this, financial institutions, basically finance companies, used to make huge investments in subscription of shares by breaching the CAR for the period between the beginning of a quarter to just before its end. "From now, they will not be able to make such investments as they have to maintain the ratio at the end of each month," he added.

Similarly, NRB has also notified that financial institutions which breach the resource mobilization limit will have to pay a fine on the amount that is more than the permitted limit. "The fine will be equivalent to the central bank's bank rate, that is 6.5 percent, at the movement and will be charged on a daily basis until the total resource mobilization is brought within the limit," he said.

In addition to that, the chief executive officer of the institutions which breach the limitation will be personally made liable and can be fined up to Rs 100,000, he added. Currently, development banks are allowed to mobilize resources 20 times more than their paid up capital and while the limitation for finance companies is fixed at 15 times.

NRB officials also informed that the central bank has recommended the Security Board of Nepal, the regulator of the share market, to arrange a separate account at the central bank to deposit all the money collected while offering IPOs. Such mechanism will force the issue manager to physically show the cash collected during the IPOs, thereby discouraging unaccounted paper transactions.

Source: Ekantipur