The Commission for Investigation of Abuse of Authority has launched an investigation into the alleged involvement of Securities Board of Nepal Chairperson Bhisma Raj Dhungana and Nepal Stock Exchange Chief Executive Officer Chandra Singh Saud in insider trading.

The issue has come to light after it was revealed that Dhungana’s daughter Rebika Dhungana and Saud’s wife Sushila Kumari Bohora each had purchased 11,911 shares of Sarbottam Cement, which is preparing to make an initial public offering (IPO) worth Rs6 million under book building mechanism.

Prem Kumar Rai, the chief commissioner of the anti-graft body, confirmed to the Post on Sunday that they have sought relevant documents from the Finance Ministry on the issue. He didn’t elaborate more on the matter.

The commission’s move comes a few days after the Finance Ministry sought clarifications from Dhungana and Saud on the issue.

Last week, the Finance Ministry had asked Dhungana and Saud to submit clarifications within three days about the media reports about their involvement in insider trading.

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

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

As per the current rules of the board, a public limited company can launch its IPO upon completion of a fiscal year after becoming a public limited company and making public the financial details of the fiscal year.

Book building is the process by which an underwriter attempts to determine the price at which an IPO will be priced. The process of price discovery involves generating and recording investor demand for shares before determining an issue price.

The company has publicly stated that it was preparing to sell the shares to the general public for at least Rs750 per unit, rather than the par value of Rs100.

Dhungana and Saud are accused of insider trading for purchasing the shares in the name of their kin at cheaper rates after getting prior information about potential prices.

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securities or causes any other person to deal in securities on the basis of any insider information or notice that are unpublished, communicates any information or notice known to such a person in the course of the discharge of his or her duties in a manner likely to affect the price of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 the Section 91 of the Securities Act-2007.

Employees Union of Securities Board of Nepal on Sunday demanded legal action against the stock regulator’s chairperson, Dhungana, after he was accused of insider trading although his job is to check such malpractices.

The union said in a statement that the reports about the involvement of Dhungana in insider trading suggested that his act amounts to “utmost moral hazard” from the perspective of honesty, legal provisions, and code of conduct of the board.

The union has demanded that those involved in such practices should be suspended and they should be punished as per sections 7(7), 12, 91, and 92 of the Securities Act.

If the board’s chairperson or a board member commits any act contrary to the interest of investors in securities or any act that may cause loss or damage to the development of the capital market, such person may be removed from the office, according to section 12 of the Act.

Section 7 of the law says if the chairperson commits any act or action contrary to the interests of the board or the development of the capital market and causes any loss and damage to the board, the government of Nepal may form an inquiry committee as prescribed and, on the recommendation of such a committee, remove him or her from the office.

A senior official at the board told the Post on condition of anonymity that the board chairperson’s move has raised questions about the integrity of the board itself and smeared its image as market regulator.

“As per reports, his [Dhungana’s] daughter purchased the shares at Rs250 per unit and it can be assumed that he, as the chair of the regulator body, had information that the price of the company’s share would be much higher,” said the board’s official.

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

“The chairperson’s act is a matter of conflict of interest,” the official said.

Dhungana, meanwhile, said that his daughter purchasing shares of Sarbottam Cement was 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.”

Dhungana also confirmed that his daughter purchased the shares of the company at Rs250 per share.

A legal expert said that an investigation should be conducted as questions have been raised.

“As per section 103 of the Securities Act-2007, the board can initiate an investigation into the issue by appointing an investigation officer if a question is raised about insider trading or if there is an indication of insider trading,” said Gandhi Pandit, a corporate lawyer. “Not only while purchasing or selling shares, insider trading can also happen if someone having insider information purchases or sells shares for himself or herself or encourages others to purchase or sell shares with a malafide intention.”