1% Shareholding Rule in Nepal: Why Large Investors May Need to Give 15-Day Prior Notice Before Selling Shares

Nepal's securities market has introduced disclosure requirements that could have a significant impact not only on company founders and promoters but also on ordinary investors who accumulate a large number of shares through the secondary market.

A key question for investors is whether buying a large stake in a listed company could create additional obligations when they later decide to sell part of their holdings.

The Rule Is Not Limited to Promoters

Many investors may assume that special share-sale disclosure requirements apply only to company founders, promoters, or institutional shareholders.

However, the provision can also affect an investor who acquires a substantial shareholding through the secondary market.

This means that an investor does not necessarily have to be an original promoter to fall within the relevant shareholder disclosure framework.

For investors participating in the Nepal Stock Exchange (NEPSE), understanding the relationship between shareholding percentage, disclosure requirements and share sales is therefore important.

Let's Understand It With a Simple Example

Suppose a listed company has a paid-up capital of Rs. 2 billion.

If the face value of each share is Rs. 100:

Total number of shares = 2 crore shares (20 million shares)

Now, what is 1% of the company's total shares?

1% = 2 lakh shares (200,000 shares)

Therefore, if an investor purchases 2 lakh shares, that investor would hold approximately 1% of the company's total outstanding shares.

This is where the implications of large shareholding become important.

What Happens If the Investor Sells 5% of the Holding?

Suppose the investor owns 2 lakh shares.

If the investor decides to sell 5% of those holdings:

2,00,000 × 5% = 10,000 shares

So, the investor wants to sell only 10,000 shares out of the 2 lakh shares held.

At first glance, selling 10,000 shares may appear relatively small compared with the investor's total holding.

However, under the relevant disclosure framework, a shareholder falling within the applicable category may need to inform the concerned company at least 15 days before selling, with the company then required to make the information public through NEPSE.

That creates an important practical issue for large shareholders.

Why Could the 15-Day Notice Requirement Matter?

Consider an investor who buys 2 lakh shares because they believe the company's fundamentals are strong.

The investor may have no intention of selling the entire holding.

Instead, after the share price rises, the investor may want to sell just 10,000 shares to:

• Lock in some profit
• Recover part of the original investment
• Reduce portfolio risk
• Rebalance the portfolio
• Raise cash for another investment

If a prior disclosure is required, the investor cannot necessarily react as quickly as a normal market participant.

The investor may have to announce the proposed sale 15 days in advance.

That can significantly change the investment decision.

Could This Discourage Large Secondary-Market Investments?

This is the central concern raised by market observers and investors.

An investor may think:

"I can buy a large quantity of shares today, but if the price rises tomorrow, I may not be able to sell even a small portion immediately without first giving advance notice."

Such a restriction could make some investors think twice before accumulating a large position.

For example, an investor considering the purchase of 2 lakh shares may calculate not only the potential return but also the liquidity and exit risk associated with holding such a large position.

This could influence how large investors participate in Nepal's secondary share market.

Large Shareholding and Investor Strategy

For a small investor, buying a few hundred or a few thousand shares generally does not create the same practical issue.

But for investors accumulating a substantial percentage of a company's total shares, regulatory compliance becomes an important part of investment planning.

Before building a large position, investors should consider:

1. What percentage of the company will I own?
2. Does my holding fall under a disclosure threshold?
3. Will a future sale require prior notification?
4. How much liquidity does the stock have?
5. Could advance disclosure affect my exit strategy?
6. What additional obligations apply to large shareholders?

These questions are particularly important when investing significant capital in relatively illiquid stocks.

The Bigger Question for Nepal's Stock Market

The purpose of shareholder disclosure requirements is understandable: market transparency, investor protection and better visibility of substantial transactions are important for a healthy capital market.

However, the practical impact on secondary-market investors also deserves discussion.

If a person becomes a substantial shareholder simply by purchasing shares from the open market, should the same type of prior-sale disclosure obligation apply?

On the other hand, if substantial shareholders can sell large quantities without advance disclosure, could that create information asymmetry for other investors?

This creates a difficult balance between market transparency and investor flexibility.

What Should Investors Do?

Investors who plan to accumulate a significant stake in a listed company should not look only at the company's EPS, book value, dividend history or technical chart.

They should also understand the regulatory consequences of becoming a substantial shareholder.

Before making a large investment, investors should verify the latest requirements issued by the Securities Board of Nepal (SEBON), the relevant company disclosures and applicable NEPSE procedures.

Regulations can change, and investors should rely on the latest official provisions before making investment decisions.

Learn Nepal's Stock Market With Practical Analysis

Understanding shareholding rules is only one part of becoming a better investor.

At Sarbaguna, investors can learn about Nepal's stock market through practical topics including fundamental analysis, technical analysis, NEPSE analysis, portfolio management, risk management and trading psychology.

You can also explore the Share Market Training in Nepal and learn how to analyze companies and market trends before making investment decisions.

For investors interested in global markets, Sarbaguna also provides a Forex Trading Course in Nepal covering practical concepts of forex trading, technical analysis and risk management.

Need Stock Market Training?

For practical guidance and training information, contact Deep Thapa on WhatsApp: 9849290806.

Frequently Asked Questions (FAQ)

1. Does the large-shareholder rule apply only to company promoters?

No. Depending on the applicable regulatory provision, substantial shareholding acquired through the secondary market can also bring an investor within the relevant disclosure requirements.

2. What does 1% ownership mean in a company with Rs. 2 billion paid-up capital?

If the face value is Rs. 100 per share, the company has 2 crore shares. One percent therefore equals 2 lakh shares.

3. How many shares are 5% of a 2 lakh-share holding?

Five percent of 2 lakh shares is 10,000 shares.

4. Does selling 10,000 shares require advance notice?

Where the applicable substantial-shareholder disclosure provision applies, the shareholder may be required to notify the company at least 15 days before the proposed sale, and the company may need to disclose the information through NEPSE.

5. Why is the 15-day notice requirement important?

It can reduce the flexibility of a large shareholder to respond immediately to market movements because the proposed sale may need to be disclosed in advance.

6. Can this affect investors who buy shares from the secondary market?

Yes. A person who accumulates a substantial stake through the secondary market may also need to consider the disclosure obligations applicable to that level of shareholding.

7. Should investors avoid buying large quantities of shares?

Not necessarily. Investors should understand the applicable rules, liquidity, risks and potential exit restrictions before accumulating a substantial position.

8. Where can I learn more about Nepal stock market investing?

Sarbaguna provides resources and training covering NEPSE analysis, fundamental analysis, technical analysis, portfolio management and stock market trading in Nepal.