Large Share Sale Pre-Notification Rule: A Question of Balance in Securities Market Principles

The recently implemented rule in Nepal's capital market, requiring major shareholders to give prior notice before selling a large volume of their shares, has sparked new debate in the market. The rule itself may be important from the perspective of market transparency and investor information. However, it has raised a fundamental question.

Why should someone wanting to sell a large volume of shares give prior notice of their sale, while someone wanting to buy a large volume of shares need not give any notice about their intention or capacity? Does the potential to influence the market arise only from large sales? Can large purchases not affect the market? These questions need to be examined from the perspective of law, general securities market principles, and investor protection.

What is the current rule?

According to Section 50 of the Companies Act, 2063, in a public company with paid-up capital exceeding NPR 250 million, an individual or institution holding 1 percent or more of the total paid-up capital is considered a "major shareholder."

The Securities Board of Nepal issued a directive on Bhadra 9, 2080 for listed companies. Under this directive, if a major shareholder wishes to sell 5 percent or more of their held shares, they must give written notice of their intention to sell to the company at least 15 days in advance. The notice remains valid for three months and must be published through NEPSE for investor information.

The main objective is for investors to know in advance that a large volume of shares is about to be sold in the market. While this objective may be positive from a transparency perspective, it must also be viewed from a practical standpoint and the general principles of the securities market.

Does only large selling affect the market?

In the stock market, price determination primarily occurs through the interaction of Demand and Supply. If a shareholder announces a large share sale, investors learn that potential supply will increase. This can affect prices, trading volume, and market psychology.

If prior information about large sales is considered necessary for investors, why shouldn't similar transparency apply to the potential impact of large purchases? If the answer to this question is simply "a buyer cannot be forced to make their plans public," then another question arises—is the primary objective of market transparency only transparency on the sell side, and not on the buy side? How valid is the argument that only sellers manipulate the securities market, while buyers do not?

The potential for market manipulation is not limited to sellers alone. The Securities Act, 2063 addresses artificial and false transactions, artificial price fluctuations, market-influencing activities, misleading statements, and fraudulent transactions separately.

Section 94 of the Act deems certain types of transactions as artificial or false. Section 95 provides that stabilizing, increasing, or decreasing the price of securities through artificial or false transactions constitutes price manipulation. Section 96 regulates activities that influence market prices with the intent to encourage someone to buy or sell securities or to discourage them from trading.

In other words, from a legal perspective, the concept of market manipulation is not linked only to the "seller." Buyers, sellers, and those who induce buying/selling can all create artificial influence on the market.

Let us understand this rule through an example

Suppose company "K" has total paid-up shares of 10 million units. A major shareholder holds 1 million units, or 10 percent of shares. They plan to sell their shares. Under the new rule, they must inform the company before selling, and that information is made public in the market.

Now, what do market investors learn? "A large supply is coming to the market," and a climate of fear may arise among investors, potentially creating a situation where they sell and flee before the supply arrives.

However, if another person has the financial capacity to buy 1 million units and is gradually placing buy orders in the market, ordinary investors do not receive prior notice that this person is buying such a large volume. This can create unequal information flow in the market.