Supreme Court ruling bars Nepal’s insurance companies from issuing shares at premium: What does it mean for the sector?

KATHMANDU: A recent interpretation by the Supreme Court of Nepal has created uncertainty in the insurance sector by holding that insurance companies cannot issue shares to the general public at a premium price, potentially affecting future public offerings as well as companies that have already raised capital through premium-priced share issues.

The Supreme Court, while interpreting the Insurance Act, 2079, has concluded that insurance companies are required to make public offerings at the face value of shares and cannot charge investors a premium. The ruling has significant implications for insurance companies planning initial public offerings (IPOs) or new share issues, particularly those that had been preparing to raise capital by pricing their shares above the face value.

The court has also issued a directive concerning the treatment of premium amounts already collected by insurance companies that had issued shares at premium prices.

However, legal experts say the ruling has not clearly addressed several important questions, including how the face value of shares should be determined and whether the provisions of the Companies Act relating to share pricing and premium issuance should also apply to insurance companies.

Impact on Future Insurance IPOs

The Supreme Court’s interpretation could directly affect insurance companies planning to issue ordinary shares to the public in the future.

Under the ruling, insurance companies would not be able to set a premium above the face value while making public offerings if the relevant provision of the Insurance Act is interpreted strictly. This could significantly alter the capital-raising strategies of insurance companies, especially those that had expected to use premium-priced offerings to raise additional capital.

The ruling has also raised questions about the regulatory approval process. The Supreme Court has held that the Securities Board of Nepal (SEBON) and the Nepal Insurance Authority (NIA) had erred by allowing or recommending premium-priced share issuance despite the restrictions contained in the Insurance Act.

The court has directed that, going forward, shares should not be issued or offered at a premium price in violation of the law.

What Happens to Premium Already Collected?

The ruling does not appear to require companies that have already issued shares at a premium to return the premium amount to investors.

Instead, the Supreme Court has directed that the amount collected above the face value from previous premium-priced share issues should be maintained in a share premium account in accordance with the Companies Act.

The court has further directed the Nepal Insurance Authority and SEBON to coordinate and instruct the concerned companies to establish a reserve mechanism to hold such premium amounts.

The Companies Act allows amounts maintained in a share premium account to be used for specific purposes, including meeting share issuance expenses and distributing bonus shares, subject to applicable legal provisions.

However, where premium income is transferred to profit for the purpose of distributing bonus shares, the company must comply with applicable tax requirements before such distribution.

Supreme Court’s Interpretation of the Insurance Act

The Supreme Court’s decision stems from a writ petition filed in relation to the premium-priced public share issuance of Himalayan Reinsurance Company.

Himalayan Reinsurance had issued shares to the general public at a premium in December 2023. Lawyers Yam Prasad Bhattarai and Bhimsen Rayamajhi subsequently filed a writ petition seeking a mandamus order requiring the company to issue shares only at their face value.

A joint bench of Supreme Court Justices Dr. Manoj Kumar Sharma and Shrikant Paudel dismissed the writ petition. However, while dismissing the petition, the court issued a directive order interpreting the relevant provisions of the Insurance Act.

According to the full text of the verdict, the petition was dismissed because the action sought by the petitioners had already been completed and, therefore, there was no basis for issuing the requested order.

Nevertheless, the court observed that the matter involved significant public interest and concern.

The full text states that SEBON did not appear to have fulfilled its legal responsibilities in accordance with the law. It also noted that the Insurance Authority had recommended premium-priced share issuance despite the provisions of the Insurance Act.

The court specifically referred to Section 45(5) of the Insurance Act, 2079, which it interpreted as requiring public invitations for share subscriptions to be made at the face value of the shares.

Conflict Between Insurance Act and Companies Act?

The Supreme Court’s interpretation has also sparked debate over the relationship between the Insurance Act and the Companies Act.

Legal experts argue that while the Insurance Act is a special law governing insurance business, the Companies Act remains relevant to general matters concerning the incorporation and operation of companies, including provisions relating to share capital and face value.

One lawyer questioned why banks and financial institutions are permitted to issue shares at a premium under the prevailing legal framework while insurance companies would be prohibited from doing so.

According to the legal argument, an insurance company is established under the Companies Act but must comply with the Insurance Act when conducting insurance business. However, questions remain about whether provisions concerning the face value and pricing of shares should be governed exclusively by the Insurance Act or interpreted alongside the Companies Act and securities laws.

The Supreme Court’s decision has therefore raised concerns about potential inconsistencies between the Companies Act, 2063, the Insurance Act, 2079, and the Securities Act, 2063, as well as regulations governing the registration and issuance of securities.

Unresolved Question Over Face Value

Another important issue that appears not to have been fully addressed in the court proceedings is how the face value of shares should be determined.

The Insurance Act provides that the full face value of shares must be called up. Legal practitioners have argued, however, that the Companies Act contains broader provisions regarding the face value of shares and the amount that can be called up when shares are issued.

Section 27 of the Companies Act provides that the face value of shares of a public company shall be the amount specified in its memorandum and articles of association, with the value per share set at Rs. 50 or an amount divisible by 10 and higher than Rs. 50.

The same section also states that, when inviting applications to purchase shares, a public company generally cannot demand more than 50 percent of the face value along with the application.

However, an exception applies to companies that have been in operation for at least three years and publish audited financial statements for the previous three years in their prospectus while raising capital.

Legal experts have argued that these provisions of the Companies Act were not adequately examined during the Supreme Court hearing.

This has led to questions about whether the court’s interpretation of the Insurance Act could have wider implications for the existing framework governing share issuance by public companies.

Insurance Companies That Have Issued Premium-Priced Shares

Several insurance companies in Nepal have already raised capital from the general public through premium-priced share offerings.

These include Nepal Life Insurance, IME Life Insurance, Citizens Life Insurance, Sanima Reliance Life Insurance, Reliable Nepal Life Insurance, and Himalayan Reinsurance, among others.

The ruling could therefore have implications beyond future IPOs, particularly in relation to the accounting and utilization of premium income already collected by these companies.

The Supreme Court’s directive indicates that amounts collected above the face value through premium-priced share issues should be maintained in a share premium account in accordance with the Companies Act.

The companies can use such amounts for legally permitted purposes, including covering expenses related to share issuance and issuing bonus shares.

However, the ruling has also raised broader questions about regulatory responsibility and whether SEBON and the Nepal Insurance Authority will need to review their existing approval procedures for insurance-sector public offerings.

Regulatory Implications

The Supreme Court’s decision places the spotlight on the roles of both SEBON and the Nepal Insurance Authority in approving public share issues by insurance companies.

The court has effectively stated that regulators should not approve premium-priced share offerings when such issuance is inconsistent with the provisions of the Insurance Act.

The directive could require regulators to revisit their internal procedures for reviewing prospectuses and approving future public offerings by insurance companies.

For companies that are currently preparing to issue shares to the public, the ruling could create uncertainty over their capital-raising plans. They may now have to reconsider proposed issue prices, capital structures, and fundraising strategies.

The decision could also trigger further legal and regulatory discussions over the hierarchy and interaction of sector-specific laws and general company and securities legislation.

The central issue now is whether the Supreme Court’s interpretation will be applied strictly to all future insurance-sector share offerings or whether the government and regulators will introduce further legal clarification to reconcile the Insurance Act with the Companies Act and securities regulations.

For Nepal’s insurance industry, the ruling could therefore represent a major shift in the way companies raise equity capital from the public, while also opening a broader debate over the legal framework governing premium-priced share issuance in the country’s capital market.