Introduction
The issuance of shares at a price exceeding their face (nominal) value is understood as the issuance of shares at a premium. This Legal Guide outlines the relevant legal provisions and procedures governing the issuance of shares at a premium in Nepal. It examines the permissibility for different types of companies, conditions and requirements, required approvals, determination of premium, utilization of the premium fund, and the applicable taxation on the issuance of premium shares.
A. Are all types of companies permitted to issue shares at a premium?
Yes. All types of companies — whether private or public, listed or unlisted — are permitted to issue shares at a premium, subject to the applicable conditions.
- For private companies and unlisted public companies, Section 29 of the Companies Act, 2063 (2006) permits the issuance of shares at a premium.
- For listed public companies conducting an Initial Public Offering (IPO), Section 29 of the Companies Act read with Rule 25 of the Securities Registration and Issuance Regulation, 2074 (2017) (“Securities Regulation”) allows issuance at a premium.
Further amendments to the Securities Regulation (dated 2076/11/01 / 13 February 2020) introduced:
- Rule 25B – permitting further public offering (FPO) at a premium price; and
- Rule 25C – providing for the book-building method for an IPO.
The book-building method is regarded as a more transparent and competitive process because the price is determined by the market itself. SEBON has issued the Book Building Directive, 2077 to regulate this process.
B. What are the conditions applicable to the issuance of shares at a premium?
For private companies and unlisted public companies
Under Section 29 of the Companies Act, the only condition is that the value of the company’s assets must exceed its liabilities.
For public companies intending to issue an IPO at a premium
Additional conditions under Rule 25 (and Rule 25C for book-building) of the Securities Regulation must be fulfilled, as summarized below:
Subject | IPO at Premium (Rule 25) | IPO through Book Building (Rule 25C) |
|---|---|---|
Profitability | Paid-up capital < NPR 1 billion → net profit for preceding 3 consecutive years | Net profit for the preceding 3 consecutive years |
Net Worth Requirement | Net worth per share must exceed the paid-up value per share | Net worth per share must be at least 150% of the paid-up value per share |
Share Valuation Report | Certified valuation report from an external expert confirming method, rationale and justification | Not based on valuation report. Price determined through Letters of Intent (LOI) from eligible institutional investors under the Book Building Directive |
Credit Rating | At least average or higher credit rating grade | Credit rating grade of ‘average’ or above |
Premium Determination | Must comply with Rule 25A of the Securities Regulation | Follows Book Building Directive procedures |
C. What corporate and regulatory approvals are required?
- Public companies (IPO / FPO / Book Building): Approval of the general meeting of shareholders + regulatory oversight and approval of the Securities Board of Nepal (SEBON).
- Private companies and unlisted public companies: No prior external regulatory approval is required (the earlier requirement of Office of the Company Registrar approval was removed by the First Amendment to the Companies Act in 2017). However, an ordinary resolution of the general meeting of shareholders is mandatory.
D. Process for issuing shares at a premium
- Board of Directors Decision – The Board decides to issue shares at a premium.
- General Meeting Approval – Shareholders pass a resolution approving the issuance.
- Valuation / Pricing –
- Private / unlisted companies: Independent expert valuation report.
- IPO at premium: Valuation as per Rule 25A.
- Book-building IPO: Process under the Book Building Directive.
E. How is the premium determined for an IPO at a premium?
For private and unlisted public companies, the premium is determined on the basis of a valuation report prepared by an independent expert valuator.
For a listed company conducting an IPO at a premium, Rule 25A of the Securities Regulation requires consideration of specific factors, including:
- For companies with paid-up capital of NPR 1 billion or more: Average of (i) capitalized earnings based on the audited financial statements of the immediately preceding two fiscal years, (ii) present value of future cash flows using the discounted cash flow method, and (iii) valuation based on internationally accepted practices recognized under Nepali law.
- For companies with paid-up capital below NPR 1 billion: Capitalized earnings calculated on the basis of the audited statements of the preceding three fiscal years.
Under the book-building method (Rule 25C), the price is determined through the market process set out in the Book Building Directive rather than a fixed valuation report.
F. Restrictions on utilization of the premium amount
The amount received as share premium (excess over face value) cannot be treated as free income. Under Section 29 of the Companies Act, it must be credited to a separate Share Premium Account and may be used only for the following purposes:
- Issuance of fully paid bonus shares by utilizing the premium to pay up unissued share capital.
- Payment of the premium on redemption of redeemable preference shares.
- Writing off preliminary expenses.
- Meeting or reimbursing expenses, commission or discount incurred in connection with any issue of the company’s shares.
G. Tax implications of issuing shares at a premium
Issuance itself is not taxable
Under the Income Tax Act, 2058 (2002), the premium received on issuance of shares is treated as a capital contribution, not as income or profit of the company. Therefore, no tax is payable at the time of issuance.
Tax on bonus shares issued from premium
On 14 December 2023 (2080/08/28), the Constitutional Bench of the Supreme Court held that the issuance of bonus shares out of the securities premium account constitutes a distribution of dividend other than out of profits under Section 56(3) of the Income Tax Act. Consequently, the value of such bonus shares is included in the taxable income of the company under Section 7(2)(h).
Although the decision specifically concerned banks and FPO premium, the principle extends, in our view, to premium received from any form of share issuance (IPO, FPO or private placement).
Summary
- Issuing shares at a premium → not taxable.
- Issuing bonus shares out of that premium → taxable.
