In a significant regulatory shift, the Securities Board of Nepal (SEBON) has softened its stance on Nepal Rastra Bank’s (NRB) proposed "Deposit to Equity Swap" model. This policy flexibility marks a major breakthrough in the high-stakes efforts to revive Karnali Development Bank, which has been teetering on the edge of liquidation, putting billions in depositor funds at risk.

Previously, SEBON's leadership resisted the central bank's model, arguing that while the NRB was focused on protecting depositors, SEBON had a mandate to safeguard ordinary stock investors. Furthermore, existing regulations strictly prohibited loss-making or problematic companies from issuing new shares or Further Public Offerings (FPOs).

However, following intensive tripartite consultations between the NRB, SEBON, and the bank’s current management group, SEBON has agreed to amend its Securities Registration and Issue Regulations. This amendment will introduce "special treatment" provisions, providing regulatory relief and a legal gateway for distressed financial institutions to restructure and issue shares.

With SEBON clearing the regulatory hurdles, the NRB-appointed management group is rapidly moving forward with its rehabilitation roadmap.

According to Tikaram Khatiwada, coordinator of the management group, the swap will not be mandatory. Depositors can voluntarily choose to convert anywhere up to 100% of their savings into ordinary shares based entirely on their own consent.

While the deposit swap is a critical first step, management acknowledges it will not generate enough capital to fully stabilize the bank. Karnali Development Bank requires at least Rs 4 billion in paid-up capital to resume regular, healthy operations. The bank plans to plug the remaining capital shortfall by issuing new ordinary shares (via FPOs or IPOs) targeted at domestic and foreign institutional investors, as well as the general public—a move now made possible by SEBON's upcoming regulatory amendments.

Karnali Development Bank was established in 2066 BS as the first regional development bank of Nepal's Mid-Western Region. However, it plunged into a severe crisis due to massive insider fraud and managerial malpractice.

An investigation by the Nepal Police’s Central Investigation Bureau (CIB) revealed that top officials, including former Chairman Rajendra Bir Raya, embezzled over Rs 3.2 billion by issuing fake fixed deposit receipts and fraudulent loans. A total of 111 individuals were prosecuted.

The depth of the bank's financial distress was laid bare by a recent Due Diligence Audit (DDA):

To prevent outright liquidation and bridge the asset-liability gap, the NRB suspended the bank's board and installed a three-member management team led by Deputy Director Khatiwada.

The bank management recently published its official future roadmap via a pop-up notice on its website, urging depositors to remain patient as rescue operations materialize.

While internal consensus within SEBON is highly positive, the securities regulator has been without a permanent chairperson for an extended period. This leadership vacuum could potentially slow down the formal board approvals required to finalize the regulatory amendments and grant ultimate clearance for the bank's share issuance.