SEBON Eases Seed Capital Rules for Mutual Funds, Signals Shift Toward Performance-Based Regulation

Dipesh Ghimire

Nepal Securities Board (SEBON) has taken a significant policy step by easing the seed capital requirement for mutual fund schemes, marking a clear shift toward performance-based regulation in Nepal’s capital market. The decision allows qualified and experienced fund managers to operate new schemes and issue additional units with lower seed capital, departing from the long-standing uniform requirement of 15 percent.

Under the revised framework, fund managers with a proven track record can now operate schemes by investing either 10 percent or, in certain cases, as low as 5 percent seed capital. Previously, the same 15 percent threshold applied to all mutual funds, regardless of experience, scale, or past performance. By introducing differentiated requirements, SEBON has attempted to recognize operational maturity and reward consistent performance within the mutual fund industry.

The board has clearly linked the relaxed provisions to experience and financial strength. Fund managers seeking the 10 percent seed capital facility must demonstrate at least three years of experience in managing collective investment schemes, maintain funds under management exceeding NPR 1 billion, and show that the average Net Asset Value (NAV) per unit over the last three years has remained above par value. In addition, managers must hold a rating above the minimum benchmark and remain free from regulatory action or suspension in the recent past.

For the more relaxed 5 percent seed capital option, the eligibility bar is set even higher. Fund managers must have a minimum of five years of experience and manage funds worth more than NPR 5 billion. They must also sustain NAV performance above par value, secure an average or higher rating, and maintain a clean regulatory record. These criteria indicate that the regulator intends to reserve maximum flexibility only for institutions with demonstrated financial discipline and governance capacity.

Despite the relaxation, SEBON has placed a clear ceiling on risk exposure. Mutual fund schemes operated under the 5 percent or 10 percent seed capital facility will not be allowed to exceed a total size of NPR 10 billion. This cap reflects the regulator’s cautious approach, ensuring that lower promoter investment does not translate into excessive market risk. At the same time, SEBON has clarified that fund managers who prefer not to meet these conditions can still operate freely by maintaining the original 15 percent seed capital requirement.

Alongside easing capital norms, SEBON has tightened its focus on risk management. The board has made it mandatory for fund managers to design and implement formal risk management policies. Each mutual fund scheme must now undergo a semi-annual stress test, with the findings reviewed internally and submitted to the regulator within a fixed timeframe. This requirement highlights SEBON’s intent to balance regulatory flexibility with stronger oversight and accountability.

The new rules also address concerns related to product overlap in the mutual fund sector. Fund managers operating multiple schemes will now be required to clearly differentiate the objectives, structure, and investment focus of each scheme. This provision aims to improve transparency for investors and reduce confusion arising from similar-looking products offered under different scheme names.

From a broader market perspective, the policy is expected to encourage the introduction of new mutual fund schemes while strengthening institutional participation in the capital market. By reducing the capital burden for experienced managers, SEBON appears to be encouraging scale, efficiency, and innovation within the sector. At the same time, mandatory stress testing and stricter disclosure norms suggest that investor protection remains at the center of regulatory priorities.

Market observers view the decision as an attempt to deepen Nepal’s capital market by strengthening demand in the secondary market through professionally managed funds. If implemented effectively, the revised framework could improve confidence among investors, enhance liquidity, and support the long-term development of the mutual fund industry. SEBON’s move signals a gradual transition from rule-based regulation toward a more nuanced system that rewards performance while maintaining systemic stability.