Banks and Financial Institutions Now Allowed to Issue Perpetual Non-Cumulative Preference Shares: Capital Base Expected to Strengthen
Author
NEPSE TRADING
The Securities Board of Nepal (SEBON) has officially opened the way for banks and financial institutions to issue Perpetual Non-Cumulative Preference Shares through the ninth amendment of the Securities Issuance and Allotment Guidelines.
This regulatory change is expected to ease the capital pressure faced by many banks and enhance their loan disbursement capacity. Although liquidity is currently adequate in the banking system, some institutions are constrained by low core capital ratios, limiting their ability to expand credit. With the issuance of these shares now permitted, banks can raise long-term capital without the obligation of redemption.
Key Features of the Preference Shares:
Face Value: NPR 100 per share.
Buy/Sell Restriction: Only promoter shareholders can trade these shares.
Private Placement Only: Maximum of 50 institutional investors; no public offering.
Retail Investors Barred: General public, stockbrokers, and mutual funds cannot invest in or trade these shares.
Dividend Policy: Dividends can only be distributed from the current year’s distributable profits, not from retained earnings or reserve funds.
Conversion & Redemption: Not redeemable or convertible unless the issuing bank becomes non-viable, in which case it can be converted into ordinary shares per NRB rules.
Capital Treatment: These instruments will count towards Additional Tier 1 Capital as per the Capital Adequacy Framework 2015.
Disclosure Requirements: All dividend terms and conditions must be clearly mentioned in the offering documents.
Priority on Liquidation: In case of liquidation, investors in these shares will be paid only after deposits, debentures, and other Tier 2 instruments are settled.
Nepal Rastra Bank had permitted the issuance of such instruments a year ago, but due to the lack of provision in SEBON's regulations, banks were unable to proceed. With the guideline now revised, banks can formally apply for issuance.
This move is seen as a significant step towards improving the financial resilience of Nepal’s banking sector and is likely to positively influence capital adequacy compliance and investor confidence in the coming fiscal period.
