Nepal's Hydropower Share Market Is Built on Unanswered Questions — And Regulators Must Act Before It Unravels

A detailed examination of Nepal's legal and regulatory framework governing hydropower companies listed on the stock exchange reveals something that should alarm every serious investor, regulator and policymaker in the country. The entire edifice of hydropower equity investment — involving 103 listed companies, market capitalization exceeding Rs 813 billion, and nearly half of all stock exchange trading volume — rests on a set of fundamental theoretical questions that nobody in authority has formally answered. The questions have been identified. The warnings have been issued. The responses have not come.

The most foundational issue is deceptively simple. A hydropower company in Nepal operates under a license that expires. Under the Electricity Act of 2049, no one may survey, generate, transmit or distribute electricity without a license, and that license runs for a maximum of fifty years. In practice, most hydropower projects today receive thirty-five year operational permits — five years for construction and thirty years for generation. When that period ends, the entire project, every turbine, every dam wall, every kilometer of transmission line, transfers automatically to the Government of Nepal. The company that built and ran the project loses its primary asset, its primary revenue source, and arguably its reason to exist. What happens next to the company, to its equity structure, and to the investors who bought shares on the secondary market at prices sometimes far exceeding the company's net worth — nobody has officially said.

This is not a theoretical concern confined to academic papers. The High-Level Economic Reform Recommendation Commission submitted to the government has stated in plain language that many hydropower companies with negative net worth are trading at high prices on the secondary market. It has warned that investors are largely unaware of how the BOOT model's transfer mechanism directly affects the value of their holdings. And it has explicitly stated that if this situation is not addressed promptly, the resulting investor losses could exceed even the damage caused by the cooperative sector crisis that devastated hundreds of thousands of Nepali savers. That is an extraordinarily serious warning from an official government-appointed body, and it deserves to be treated as such.

The theoretical problem with treating hydropower shares as ordinary equity is not merely a Nepali peculiarity — it strikes at a fundamental principle of securities law. Equity shares, by their very nature, are designed to be perpetual instruments. They represent an ownership stake in a going concern that has no predetermined end date. A company registered under the Companies Act of 2063 is, in theory, an entity that continues indefinitely. But a hydropower company whose sole asset and revenue source disappears at the end of a thirty-five year license is not, in any meaningful sense, a perpetual going concern. Its shares have an implied expiry date built into the underlying business model, even if no prospectus says so in those exact words. No established securities market anywhere in the world has developed a framework for trading time-limited equity instruments of this character — which means Nepal has been running a financial experiment without a playbook.

The Securities Registration and Issuance Regulations of 2073 require that a company seeking IPO approval must demonstrate through its audit report that it qualifies as a going concern — meaning it can be expected to continue operating indefinitely without material disruption. Hydropower companies have been satisfying this requirement because their projects are operational and their licenses are current. But the going concern standard was designed for companies whose business model does not have a government-mandated termination date written into its operating license. Applying it mechanically to BOOT model companies without addressing what happens post-transfer is a regulatory fiction that eventually reality will puncture.

The prospectus disclosure problem compounds this risk significantly. The Securities Registration and Issuance Regulations require companies to disclose inherent risks and management's response to those risks. But an examination of prospectuses filed by hydropower companies shows that virtually none of them address the risk arising from project transfer after the license period. Investors reading a company's offering documents are given financial projections, debt repayment plans and revenue forecasts — but not a clear explanation of what the company will do, or what their shares will be worth, in year thirty-one of a thirty-year project. This is not a minor omission. It is a structural gap in investor protection that the Securities Board of Nepal has the authority and the obligation to close.

The rights share issuance pattern raises additional concerns that deserve specific regulatory attention. Among the twenty-three companies that applied for rights share issuance as published on Falgun 18, 2082, more than half were hydropower companies. When examining the stated purpose of these rights issuances, a recurring pattern emerges: many companies are raising fresh equity from existing shareholders to repay bank loans taken to build projects that are already operational. The troubling dimension of this pattern is that some companies are seeking rights share approval for the same purpose for which they received their original IPO approval — repaying construction debt. Allowing repeated public issuances for identical purposes, from the same pool of retail investors, without clearly explaining why the first issuance was insufficient, raises questions about whether the capital market is being used as a mechanism for repeatedly transferring financial risk from project developers to ordinary investors.

The concentration of multiple companies promoted by the same individual or group on the stock exchange creates a different category of systemic risk. When a single promoter group controls several listed hydropower companies simultaneously, the failure or financial distress of one entity can cascade through the others, triggering a coordinated collapse that individual company analysis would never predict. The commission's report recommends addressing this through merger or demerger mechanisms, but the regulatory framework for mandating such consolidation among listed hydropower companies has not been developed.

The founder share trading issue adds yet another layer of vulnerability. When hydropower companies conduct IPOs, they register founder shares and issue a percentage to the public. Founder shares are subject to lock-in periods under regulations. But once the lock-in expires, there is no clear legal provision specifying in which category a founder must sell — and no effective mechanism preventing a founding promoter from quietly liquidating a large position in the secondary market, exiting the company they built while retail investors remain. This is not hypothetical. In a market where company management and operational expertise are concentrated in founding teams, the possibility of silent promoter exit represents a genuine governance risk for which the current framework provides inadequate protection.

The conclusion that emerges from a comprehensive reading of these issues is that Nepal's capital market is running a structural risk of significant magnitude, concentrated precisely in the sector that dominates trading activity. The government's own policy documents, its own commissioned report, and the basic architecture of electricity sector law all point to the same unresolved tension: hydropower companies have been allowed to issue perpetual equity in businesses that are legally required to surrender their core assets to the state within a defined timeframe. The Nepal government, the Ministry of Energy, the Ministry of Finance, the Electricity Regulatory Commission, and the Securities Board of Nepal must now sit together and provide coordinated, legally binding answers to the questions that have been hanging in the air for too long.

What type of financial instrument — ordinary equity, project bond, infrastructure bond, or a specially designed limited-life vehicle — is appropriate for BOOT model hydropower companies? What happens to a listed company's equity structure after project transfer, and what are shareholders entitled to receive? How should prospectuses disclose transfer risk, and what minimum reserve requirements should companies maintain as their license period approaches its end? Can the same company raise fresh public capital repeatedly for debt repayment, and if so, under what conditions? How should multiple companies controlled by the same promoter group be managed to prevent systemic contagion?

These are not questions that can wait for a market crisis to force the answers. By the time the first major hydropower license expiry begins to approach — and given that projects licensed in the 2050s will reach their transfer dates within the next decade — the question of what happens to hundreds of thousands of retail investors' holdings will no longer be theoretical. Whether Nepal's regulators move now to build a coherent framework, or wait until the problem arrives fully formed, will determine whether the country's capital market emerges from the hydropower era stronger and more trusted, or damaged in ways that could take a generation to repair.