Some listed company promoters and directors in Nepal are increasingly resigning from their positions and selling shares, taking advantage of what experts describe as a legal loophole.

Under current regulations, individuals holding board or senior management positions in listed companies are prohibited from selling shares during their tenure and for one year after leaving office. This rule has led some insiders to step down strategically so they can exit through share sales once the restriction period ends.

A Securities Board of Nepal (Sebon) official said the trend has recently increased. “Some directors have been systematically resigning from their positions,” the official said. “Some have even lobbied Sebon to approve IPOs for loss-making companies. They plan to eventually sell their holdings and exit.”

Earlier, such practices were mainly seen in hydropower companies. However, market experts say the trend has now expanded to listed firms in investment, manufacturing, processing, hospitality, tourism and trading sectors, where directors and senior executives are stepping down and preparing to sell shares after the lock-in period.

Under the current framework introduced by Sebon to bring private sector companies into the stock market, there is a three-year lock-in period for promoters and a one-year restriction on share sales after leaving senior positions. Critics say this structure is now being misused.

Former Sebon executive director and capital market expert Niraj Giri said the provision itself is being exploited. “We had tried to revise the three-year lock-in even during my time at the board, but it was not possible,” he said. “Now some promoters are misusing the arrangement.”

He said the issue is no longer limited to hydropower firms and has spread across sectors. According to him, some companies are also entering the market primarily to raise funds and then allowing insiders to exit through share sales.

Giri also said IPO prospectuses include a payback period, under which initial directors are expected to remain in place to ensure delivery of promised returns and project development. Their early exit, he said, weakens governance, leadership and expansion plans.

“Investors buy shares based on the prospectus, business plan and leadership structure,” he said. “When key promoters exit, it affects governance and execution. This is already happening in some companies.”

He added that the lock-in rules should be revised so that promoters can gradually sell shares during the payback period rather than exiting abruptly.

A study by Sebon on hydropower companies also found that many promoters exit shortly after the lock-in period ends because they do not fully trust long-term returns from their own projects. The report, titled “Current Structure and Impact of Shareholding in Listed Hydropower Companies,” was submitted to the Sebon board on June 30, 2023, but has not been made public.

According to the report, promoters of most hydropower companies sell shares and exit after the lock-in period ends. An analysis of 43 listed companies at the time found that promoters in 20 hydropower firms had sold shares.

The number of listed hydropower companies has since increased to 105.

Investor Tilak Koirala said promoter exits have weakened governance in many companies. “Because promoters have left, many companies no longer have meaningful promoter ownership,” he said. “With most shares now dispersed among public investors, holding annual general meetings has become difficult due to a lack of quorum.”

He added that the problem is more visible in sectors without strong direct regulatory oversight, leading to weaker governance and reduced investor protection. “Special legal provisions are needed for such sectors,” he said. “Otherwise, governance and stability will deteriorate further, and investors’ money will be at risk.”

The report also recommends revising securities laws to better regulate IPO issuance, rights issues and shareholding structures.

It concludes that promoter exits negatively affect hydropower companies, corporate operations and investor returns.

Among its key recommendations, the report suggests that promoters should be required to hold at least 30 percent of shares for seven years. It also proposes that Sebon determine the proportion of promoter shares that can be converted into public shares based on project repayment timelines.

The report further notes that many hydropower companies have failed to complete projects within three years of listing, calling for stronger regulatory provisions.