The Securities Board of Nepal (SEBON) has introduced a key policy change by enabling banks and financial institutions (BFIs) to issue Perpetual Non-Cumulative Preference Shares (PNCPS), a move anticipated to alleviate the pressure on their capital adequacy requirements. Financial experts believe this initiative will enhance the lending capacity of BFIs by providing a more flexible approach to capital management.
This provision has been introduced through the ninth amendment to the ‘Securities Issuance and Distribution Directive.’ Although the Nepal Rastra Bank (NRB) had already granted approval for the issuance of PNCPS last year, the lack of corresponding regulatory alignment from SEBON had stalled implementation. With this regulatory update, the BFIs now have a clear path to proceed.
PNCPS differ from traditional preference shares in that they do not accumulate unpaid dividends. A fixed dividend is declared at the time of issuance, and even if a BFI decides to retain earnings instead of distributing dividends in any fiscal year, the holders of these shares cannot claim those missed dividends in the future. This characteristic provides issuing institutions with greater financial flexibility.
From a regulatory perspective, SEBON has classified PNCPS as part of Additional Tier I Capital under the Basel III framework. This classification supports BFIs in meeting their capital adequacy requirements. Because these shares typically carry lower dividend rates than common equity, BFIs can reduce their overall cost of capital. Furthermore, the ability to defer dividend payments without penalties grants BFIs enhanced liquidity management during challenging economic conditions.
However, the amended directive limits the issuance of PNCPS to institutional investors only. This includes banks, insurance companies, and other corporate entities, while individual investors, stockbrokers, and mutual funds are barred from subscribing. The issuance must be carried out via the circulation method.
This policy shift arrives at a crucial time when many BFIs are facing a surplus of liquidity due to sluggish loan demand. Coupled with NRB’s mandatory requirement that BFIs maintain a minimum capital adequacy ratio of 11.5 percent of their risk-weighted assets, institutions have been under pressure to strengthen their capital base. SEBON’s reform is therefore expected to help BFIs strike a balance between regulatory compliance and business growth.
Bankers have welcomed the move, noting that the ability to issue PNCPS will offer them a viable tool to enhance their capital position and extend more credit to the market. This development could play a significant role in reviving lending momentum and supporting economic activities.
