KATHMANDU, MAY 14 The arrest of Nepal Investment Mega Bank (NIMB) Chief Executive Officer Jyoti Prakash Pandey over the auction of collateral linked to defunct Smart Telecom has triggered widespread criticism from the banking industry, legal experts and business circles. Many believe the Central Investigation Bureau (CIB) acted hastily without fully considering the legal complexities of the case, creating uncertainty in the financial sector and setting banking laws on a collision course with telecommunications regulations. Experts also believe that the development is likely to set a bad precedent and literally open a can of worms in so far as Banks funding projects of national pride are concerned. Especially projects in telecom and Hydropower sector which revert to the government's ownership once the license period ends. At the centre of the dispute is a crucial legal question: when a telecom company loses its licence, do the rights of secured creditors under financial laws prevail, or does the state gain priority over the company's infrastructure under telecom regulations? The CIB arrested Pandey on charges of fraud and criminal breach of trust under the Criminal Code Act, 2017, alleging that NIMB illegally auctioned assets that had already become government property. Investigators have based their case on the Asset Management Rules for Telecommunications Service Providers Whose Licenses are Not Active, 2022. Rule 18 states that once a licence is cancelled, all related assets, infrastructure and networks come under the control of the Nepal Telecommunications Authority. Smart Telecom's licence was automatically cancelled in April 2023 after the company failed to clear nearly Rs 30 billion in dues owed to the government. However, the banking sector argues that the arrest ignores stronger protections granted under the Banks and Financial Institutions Act (BAFIA), 2017. Sections 55 and 57 empower banks to auction collateral to recover unpaid loans, using the phrase 'notwithstanding anything contained in prevailing law.' Acting on written instructions from Nepal Rastra Bank (NRB) to classify the loan as non-performing and initiate recovery, NIMB auctioned Smart Telecom's pledged equipment to Ncell for Rs 4.60 billion in September 2025. Legal experts say the government's case faces a serious challenge over the hierarchy of laws. Section 33 of the Telecommunications Act, 1997 provides for state takeover of assets only in companies with more than 50 percent foreign ownership after licence expiry. Smart Telecom, however, was a domestically invested company. They argue that Rule 18 unlawfully extended this provision to all cancelled licensees regardless of ownership, making it potentially ultra vires-a delegated regulation exceeding the authority of the parent law. The bank's position is also strengthened by the Secured Transactions Act, 2006, which gives priority to registered security interests. NIMB had reportedly registered its claim over Smart Telecom's machinery and equipment before the licence cancellation. Further support comes from the Companies Act, 2006, which protects secured creditors' rights even during liquidation proceedings. Bankers say the state cannot claim ownership of assets while refusing responsibility for the liabilities attached to them. If the government insists Smart Telecom's infrastructure is now public property, they argue, it must also assume the Rs 5.2 billion debt linked to those assets. Industry leaders warn that failure to uphold creditor rights could severely damage confidence in Nepal's lending system, making future financing for infrastructure and large-scale projects far more difficult. The arrest has sent shockwaves through the banking community. NRB Spokesman Guru Prasad Paudel said the right to auction collateral under BAFIA remains the bank's 'first right.' An emergency meeting of the Nepal Bankers' Association (NBA) reportedly revealed deep concern among chief executives, with one participant describing the mood as one of 'terror'. NBA President Santosh Koirala condemned the arrest, saying detaining someone for exercising a legally granted right could create serious long-term consequences for the financial system. As the investigation proceeds, the case is expected to become a landmark legal battle that could define the balance of power between regulators and lenders-and determine whether Nepal can offer the legal certainty investors especially foreign investors seek.