In Nepal, Collective Investment Schemes (CIS) serve as a vital tool for fostering investor trust by adhering to a robust legal and regulatory framework. This framework is meticulously designed to cultivate confidence and a sense of security among investors regarding their financial commitments.
Specifically, Chapter 6, sections 71 to 75 of the Securities Act 2063, delineate crucial provisions governing the operations of collective investment. These sections not only outline the structural guidelines for CIS but also emphasise the legal safeguards and recourse options available to investors. By ensuring that investors have clear channels for protection and resolution, these laws significantly enhance the credibility and reliability of the investment environment, thus nurturing a deeper sense of assurance in the overarching regulatory framework.
How Is the Regulatory Framework Structured?
The primary regulations for CIS in Nepal, set by SEBON under the Securities Act 2007, are established to protect investors and ensure market integrity, fostering a feeling of safety. SEBON oversees the entire lifecycle of CIS operations, from establishment to ongoing monitoring and enforcement, ensuring investor protection and financial system integrity, which reassures investors about the safety of their investments.
SEBON oversees the entire lifecycle of CIS operations, from establishment to ongoing monitoring and enforcement, ensuring investor protection and financial system integrity. CISs are typically structured as trust arrangements in Nepal. In this structure:
- The sponsor establishes the funds,
- A trustee holds the assets on behalf of the unit holders,
- An asset management company manages the investments.
This three-party arrangement helps reduce the risk of misappropriation, separating management from asset custody.
What Are the Legal Requirements for Establishing a CIS in Nepal?
To operate CIS, an entity must first obtain SEBON’s approval. The application process involves submitting detailed documents, including a trust deed, an investment management agreement, an offer document, and proof of meeting the minimum capital requirements. Understanding SEBON’s specific criteria for evaluating applications can help investors assess the credibility and stability of CIS operators. The sponsor must also demonstrate its financial capacity and relevant experience in the securities or financial services industry.
Additionally, asset management companies must be separately licensed by SEBON and maintain a minimum capital requirement of NPR 50 million. This ensures that only well-capitalised entities manage investors’ funds. SEBON reviews applications based on several criteria, including the directors’ competence, the adequacy of systems and controls, and the proposed investment strategy.
This comprehensive review process by SEBON ensures that only competent, well-prepared entities are permitted to operate CIS, thereby instilling investor confidence in the safety and reliability of the schemes they choose to invest in.
What Are the Investment Rules for CIS in Nepal?
CIS includes mutual funds, venture capital, and private equity, which allow investors to pool resources for investments in diversified assets, clarifying the range of permitted investment types. The regulations cover aspects such as registration, governance, reporting requirements, and the roles of fund managers to ensure funds are managed ethically and in compliance with legal standards.
The Securities (Mutual Fund) Regulation 2010 outlines the investment restrictions and portfolio requirements for CIS. These funds must define their investment objectives, whether for growth, income, or a balanced approach, and must adhere to specific guidelines:
- Equity-oriented schemes must invest at least 65% of their assets in listed shares.
- Debt-oriented schemes focus mainly on government securities and corporate bonds.
CIS is restricted from making investments in unlisted securities except in specific circumstances. There are also prohibitions on short selling, margin trading, and trading in derivative instruments. These restrictions aim to protect investors from high-risk activities that are unsuitable for Nepal’s relatively underdeveloped market.
What Are the Duties and Responsibilities of Trustees and Asset Management Companies?
Trustees and Asset Management Companies (AMCs) in Nepal have a duty to ensure the proper management of Collective Investment Schemes (CIS) and safeguard investor interests. Trustees and Asset Management Companies (AMCs) in Nepal have a duty to ensure the proper management of CIS and protect investor interests, which should reassure potential investors about their protections.
Role of Trustee
The trustee plays a crucial role in safeguarding unit holders’ interests. They hold legal title to the scheme’s assets and ensure the scheme complies with the trust deed and regulatory requirements. Trustees must be independent of both the asset management company and the sponsor, typically being banks or financial institutions. Their responsibilities include ensuring proper asset valuation, reviewing all transactions, and facilitating unit holder meetings when necessary.
Duties of the Asset Management Company
The asset management company is responsible for day-to-day portfolio management. This includes making investment decisions, calculating net asset values (NAVs), maintaining accounting records, and handling subscriptions and redemptions. The company must also establish robust compliance and risk management systems to prevent conflicts of interest and ensure fair treatment of investors. SEBON requires that key personnel in asset management companies have relevant qualifications and experience in investment management.
How Are Unit Holders Protected Under Nepal’s CIS Regulations?
Unit holders in CIS have several statutory rights. These include the right to:
- Attend and vote at unit holder meetings,
- Receive distributions based on the units held,
- Redeem units according to the terms of the scheme.
The regulations ensure that unit holders cannot be unfairly excluded from these rights, although specific procedures may vary across schemes. Asset segregation is a key protection for unit holders, ensuring that the assets of the CIS are held separately from those of the asset management company, sponsor, and trustee, thereby safeguarding investments if any of these parties face financial difficulties. This asset segregation ensures that if any of these parties encounter financial challenges, the unit holders’ investments remain protected.
What Are the Fees and Charges in Nepal’s CIS?
Regulations set maximum fees that can be charged to schemes and unit holders. For example, initial subscription fees typically cannot exceed 6% of the investment amount. Annual management fees are capped at 2.5% to 3% of the net asset value, depending on the type of scheme. Performance-based fees may be charged only if specified in the offer document and must be tied to the scheme’s performance relative to an established benchmark. These fees are designed to avoid incentivising short-term volatility and focus on sustained performance.
What Are the Key Challenges in the Nepali CIS Market?
Although Nepal’s regulatory framework for CIS is well-developed, the market still faces several challenges, including market penetration, investor awareness, and operational efficiency, which require ongoing attention and improvement.
- Liquidity - The relatively shallow market and limited number of investors can make it difficult for schemes to maintain sufficient liquidity.
- Distribution Channels - Nepal lacks widespread, well-established distribution networks for CIS products, meaning asset management companies must build relationships with banks, brokers, and financial advisers to reach potential investors.
- Investor Awareness - The general lack of understanding about CIS structures and their associated risks means that investor education is critical to market development.
What Regulatory Changes Could Affect the Market?
Nepal’s CIS regulatory framework continues to evolve. SEBON is working to modernise the rules and introduce alternative investment structures such as exchange-traded funds (ETFs) and real estate investment trusts (REITs). These reforms are likely to improve market liquidity and attract more institutional and retail investors. However, such changes could present additional compliance challenges for market participants.
Conclusion
Nepal’s Collective Investment Schemes offer an attractive investment vehicle for those looking to diversify their portfolios in a developing market. The regulatory framework provides strong investor protection, with strict guidelines on transparency, risk management, and governance.
However, challenges such as market liquidity, limited distribution channels, and a need for greater investor education remain. If you are an investor considering entering Nepal’s CIS market, it is essential to conduct thorough due diligence and seek professional advice to navigate the regulatory landscape.
Staying informed and maintaining compliance with SEBON’s requirements will help you capitalise on the opportunities this growing market offers.
