The Securities Board of Nepal (SEBON) granted one company permission to issue an initial public offering (IPO) on October 6, after a gap of nearly six months. Since April 15, that is the only company to have received approval to issue an IPO.
Meanwhile, 117 companies have applied to the board for permission to issue shares to the public. Together, they have sought approval to issue 510 million shares worth a total of Rs 71.13 billion.
Some companies have applied to issue shares at the face value of Rs 100, while others have sought approval to issue them at a premium. Most, however, have applied to issue shares at the face value.
The number of companies seeking IPO approval continues to grow, but the board has largely halted the approval process. Asked why approvals have been withheld, the board’s spokesperson and senior officials have given a similar explanation: applications have been submitted, but the companies have yet to complete the required procedures.
SEBON Chairperson Dr Gopal Prasad Bhatt said an IPO was not necessarily an appropriate way for every company to raise capital.
“Companies must meet certain criteria to issue an IPO. An IPO may not be the right way for every company to raise capital,” he said.
Bhatt said IPOs were generally unsuitable for companies whose businesses were tied to a fixed period. He also pointed to unresolved questions concerning hydropower companies.
“In the case of hydropower companies, many issues remain unanswered. After 30 years, ownership of the project is transferred to the government. What happens to the company’s business after that? What happens to the shares held by the general public? These are some of the uncertainties,” he said.
The board has said it will no longer grant IPO approval to just any hydropower company.
Bhatt said the board had already made the criteria public and companies that fulfil the requirements would receive approval. The board has also published details of the procedural steps completed by companies that have applied for IPO approval. According to the board, a dozen companies have submitted all the required documents.
Nine companies have also met the board’s latest requirement that their net worth per share must be at least Rs 100. However, it remains uncertain when they will receive approval to issue their IPOs.
The nine companies that have met the criteria, including the minimum net worth requirement, are Sanima Hydropower, IME Limited, Richet Hydropower, Him River Power, Hilton Hydropower, Habitat Power, NC Agrotech, Ashutosh Energy and Kantipur Pharmaceuticals.
All nine companies have applied to issue shares at a face value of Rs 100. Their net worth per share ranges from Rs 105 to Rs 263.61. Even companies with net worth per share above the face value, established businesses and substantial operations have yet to receive permission to issue IPOs.
SEBON spokesperson Niranjay Ghimire said that although these companies appeared to have completed the paperwork, the board still had to carry out its own assessments.
“Completing the paperwork alone is not enough. We also have to verify the information contained in those documents,” he said. “In addition, field inspections are conducted for some projects.”
However, founders of companies waiting for IPO approval have complained that delays at the board have forced them to repeatedly submit documents that they had already provided.
“We submit various documents based on our financial statements in advance, but the board does not act on them. Time passes, and when another financial year begins, we are asked to provide updated statements. Those documents are then left pending as well. We are tired of repeatedly updating and resubmitting documents, yet we still do not get approval,” a founding shareholder of one company said.
The shareholder alleged that the board had taken such an approach under pressure from various groups of stock market traders.
“It should be a matter of pride that companies with a net worth per share higher than their face value are seeking to enter the capital market through IPOs,” the shareholder said. “A few years ago, manufacturing industries were encouraged to enter the capital market. We converted our company from a private to a public company, but now we are facing the same procedural hurdles. Is this the investment climate we are supposed to have?”
Mohan Kumar Dangi, president of the Independent Power Producers’ Association, Nepal (IPPAN), said some hydropower projects had already been completed but were still waiting for IPO approval.
“Once a project is completed, it starts generating commercial revenue. Capital is needed while the project is being built,” he said. “The Securities Board might as well introduce a policy explicitly stating that hydropower companies cannot issue IPOs, rather than keeping them waiting.”
Dangi said companies incorporated the capital expected to be raised through IPOs into their investment plans, and delays by a government agency created difficulties for them.
Under existing regulations, hydropower companies must reserve up to 10 per cent of their issued capital for residents of project-affected areas. However, he said, the board’s failure to grant IPO approval had prevented companies from issuing those shares to local residents as well.
While the government has set a target of generating 30,000 megawatts of electricity within 10 years, energy entrepreneurs say government agencies are creating obstacles to achieving that goal. Companies that applied for IPO approval have remained stuck in the board’s pipeline for years.
According to a board official, the merchant bankers handling IPO applications for 76 of the 117 companies have been asked to provide various updated details because those companies have not completed the required procedures.
The board has instructed merchant bankers to conduct objective assessments before submitting applications, ensuring that the issuing companies meet the requirements relating to their financial and management conditions and the absence of conflicts of interest.
They have also been asked to submit compliance reports demonstrating that they meet the criteria, based on their audited financial statements for the fiscal year 2082/83 or financial statements certified by an auditor.
Companies legally required to issue IPOs, but approvals withheld
Under the Securities Registration and Issue Regulations, hydropower companies are required to issue IPOs to residents of project-affected areas. The regulations require hydropower projects to set aside up to 10 per cent of their issued capital for residents of the affected areas.
The regulations also state that when issuing securities to residents of affected areas, companies must give priority according to the classification of affected areas specified in the project’s environmental impact assessment report, where such a classification has been made.
Hydropower companies can issue shares to affected local residents only after receiving IPO approval from the board. However, when the board withholds approval for an IPO, the shares reserved for local residents cannot be issued either.
SEBON Chairperson Bhatt said some policy provisions introduced in the past had been flawed.
“Policies need to be revised in line with changing circumstances. Some of the provisions introduced earlier may need to be amended,” he said, adding that the board was now focused on updating the regulatory framework.
Banks, financial institutions and insurance companies are also required by regulatory provisions to issue 30 per cent of their shares to the general public. However, applications from three microinsurance companies are also pending with the board.
In 2016, the board introduced a provision allowing companies in the real and manufacturing sectors to enter the stock market by issuing just 10 per cent of their shares to the public. The move was intended to address the limited representation of manufacturing companies in the market.
The policy was introduced with several objectives, including improving transparency in companies’ financial statements, increasing tax revenue, expanding the representation of manufacturing businesses in the stock market and making shares available to the general public.
Following this regulatory relaxation, several companies operating manufacturing industries converted from private to public companies. They also began making their business transactions and financial statements more transparent and systematic.
Among the companies currently in SEBON’s IPO pipeline, those in the production and processing sector have sought the largest amount of capital.
There are currently 18 companies from this sector listed on the Nepal Stock Exchange (NEPSE). Another 32 companies have applied to SEBON to issue IPOs worth a combined Rs 35.71 billion, but approvals have almost come to a halt.
Hydropower companies account for the largest number of applicants among the 117 companies waiting for IPO approval. A total of 39 hydropower companies have applied to issue shares worth Rs 19.09 billion.
Companies in the production and processing sector, meanwhile, have sought the largest amount of funding. The 32 companies in this category have applied to issue IPOs worth a combined Rs 35.71 billion.
