The Securities Board of Nepal has responded to the Finance Ministry's query regarding allegations of insider trades of shares in Sarbottam Cement that the company is outside its regulatory purview.

Last week, the Finance Ministry had asked the Securities Board of Nepal and the Nepal Stock Exchange to submit clarifications about the alleged involvement of SEBON Chairperson Bhisma Raj Dhungana and NEPSE CEO Chandra Singh Saud in insider trading after their relatives bought promoter shares of Sarbottam Cement.

The company is preparing to make a Rs6 million initial public offering (IPO) under the book building mechanism. Book building is the process by which an underwriter attempts to determine the price at which an IPO will be priced.

A controversy arose after it was revealed that Dhungana’s daughter Rebika Dhungana and Saud’s wife Sushila Kumari Bohora had each purchased 11,911 shares of Sarbottam Cement at a price less than what the underwriter was expected to set for the IPO.

“We wrote to the Finance Ministry that the company's IPO had not been approved, and that its shares were not listed on NEPSE, and that it was outside our regulatory purview,” said a senior SEBON official. “So, we have stated that whatever has been reported in the media is just a rumour.”

Early this week, Dhungana told the Post that his daughter had bought the shares for Rs250 apiece while Sarbottam Cement has publicly stated that the IPO offer price will be at least Rs750 per share.

Dhungana and Saud have been accused of insider trading as they were informed about the potential price of Sarbottam shares.

If any person deals in securities or causes any other person to deal in securities on the basis of any insider information or notice that are unpublished, communicates any information or notice known to such a person in the course of the discharge of his or her duties in a manner likely to affect the price of securities, such individual shall be deemed to have been committed an insider trading in securities, according to Section 91 of the Securities Act 2007.

After Sarbottam Cement sought the board’s assistance in facilitating the launching of the company’s IPO, the relatives of Dhungana and Saud appear to have taken advantage of insider information about the potential price.

According to a SEBON official, Sarbottam Cement had asked the board to facilitate the launching of its IPO through the book building method two months before the completion of the fiscal year after the company was registered as a public limited company.

Even though the board has insisted in a letter to the Finance Ministry that the company has not come under its regulatory process, a senior board official said that it could not detach itself from its regulatory responsibility after the company applied for facilitation for issuing the shares.

“Even when the company signed a Memorandum of Understanding with Global IME to work as issue manager, the board’s representative was present,” the official said. “If the board chair himself gets involved in an ‘unethical practice’, its ability to regulate insider trading done by others is undermined.”

As per the Code of Conduct for the Board Members of the Securities Board of Nepal 2017, a board member should not engage in activities to benefit himself or herself or family members by using his or her position in the transactions of listed companies and securities traders licensed by the board.

Dirgha Raj Mainali, chief of the financial sector management and corporation coordination division at the Finance Ministry, said that he was yet to see the response of the board as he had been on a prolonged leave.

The promoters of Sarbottam Cement have been publicly saying that they hope to see the IPO offer price to be set at over Rs750 per share, but the proposed price is yet to be approved by the SEBON.

The regulator of the stock market needs to make an evaluation of investor demand and give its okay to set the issue price before the company can make the IPO.

Former chairperson of the board Surbir Poudyal said that as the stock market regulator had not yet approved the proposed prices of Sarbottam’s shares, no influence of the board’s chairperson is visible in the pricing of the company’s public shares.

“But given that his daughter has already purchased shares of the company, we cannot rule out the potential influence of the board’s chairperson in determining the inflated price of Sarbottam’s shares for the IPO,” he said. “It is a matter of intention.”

Poudyal said that he could not categorise the purchase of shares by Dhungana’s daughter as insider trading since she has not been found to have taken undue advantage as the IPO offer price is yet to be approved by the board.

In an interview with the Post early this week, Dhungana defended the purchase of Sarbottam’s shares by his daughter as her independent decision.

“As my daughter is married and no longer belongs to my own family, her decision to buy shares does not fall under the category of insider trading,” Dhungana claimed. “There has been no violation of laws when she purchased those shares.”