- Counterparty limitations:

The moment an RF deal is done on the basis of a BR rather than actual securities, the
lending bank has to contend with the possibility that the BR received may not be backed
by any/adequate securities. In effect, therefore, it may be making an unsecured loan, and
it must do the RF only if it is prepared to make an unsecured loan. This requires assessing
the creditworthiness of the borrower and assigning him a "credit limit" up to which the
bank is prepared to lend. Technically, this is known as a counterparty limit. Strictly, a
counterparty limit is required even if an RF is done against actual securities because the
securities may decline in value and the RF may end up becoming only partly secured
though it was fully secured to begin with. This has to be controlled.

Provisions as per the Securities Act 2007 in Nepal for Capital Market Fraud:

As per the Act, this scam would fall under the following subsections:

91. Insider Trading

92. A person likely to be involved in Insider Trading

93. False Trading

95. Fluctuation in price

96. To affect the stock price

97. To supply misleading statements

98. Fraudulent transaction

99. Prohibition on transaction of securities by fraud or misrepresentation

100. Destroy or concealment of documents, statements or records

Except for the punishment under Subsection 1 of section 101 for Insider trading:
(1) A person who commits an insider trading as referred to in Section 91 shall, upon being
convicted of the offence of insider trading, be liable to the punishment with a fine equal to the
amount in controversy or with imprisonment for a term not exceeding one year or with both
punishments.

Other punishments that include petty fines and jail time seem very less compared to the
magnitude at which this scam can be done. This means if a scammer manages to manipulate
evidence and prove that he/she is guilty of other frauds except Insider trading, he/she might get
off easily. Moreover, a regulation specifying the procedures to identify insider trading and the
persons involved along with the amount of penalty is yet to be enforced.

The information is usually leaked by a member of the board of directors, company employee,
shareholder or a professional service provider. In many cases, board members of companies were
found revealing information to relatives and confidants who subsequently used the information
to make undue profits.

NEPSE took action against 14 firms on suspicion of being involved in insider trading. These
involved Kabeli Bikas Bank, Saptakoshi Bikas Bank, Taragaon Regency Hotel, Salt Trading
Corporation, Om Development Bank, Midas Securities, Central Finance, Kalika Microcredit,
Nepal Community Development Bank, Mega Bank, Himalayan Bank, Mission Development
Bank, Sunrise Bank and Shangri-La Development Bank.

Most of these firms failed to report to the regulator on time over the dividend they planned to
offer to their shareholders. The authorities however have no mechanism to detect or penalise
insider trading.

With the regulator being all bark and no bite, many firms are blatantly breaching the rule by not
providing their financial record to SEBON on time. In the past few months, the board has asked
for clarification from 31 such firms.

In the 13 years since the law was passed, not a single person has been punished on the
charge of insider trading. The Nepal Stock Exchange has only temporarily suspended
trading in shares of such companies.