IPO Experience in Nepali Capital Market

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In the two IPOs, about Rs 7.5 billion of public money has been deposited. Out of this, only Rs 57.6 million will be utilized as capital which is less than 1 percent of the deposited fund. The remaining 99 per cent will be refunded after nearly two months.
--By Niranjan Phuyal
In Nepal, when companies issue shares to the general public, they have to follow the Securities Registration and Issue Regulations 2008. As per this Regulation, normally the company which is issuing its shares to the general public should issue at par value.  Rule 24 of the Regulation further clarifies that if any company wants to issue its shares at premium, then the maximum range can be up to its net worth per share, provided that the other stated conditions are fulfilled. However, the Regulation has no provision for issuing shares in discount. The market practice is such that the companies which have net worth per share less than their par value are issuing shares at par value. It means people are paying more than it is actually worth.  
Last month, the Nepali capital market observed two IPOs in the same week. One was issued by Barun Hydro Power Company Ltd (BHPC) and the other by Janautthan Samudayic Laghubitta Bikas Bank Ltd (JSLB). Although there were few collection centers in Kathmandu for both IPOs, people were seen standing in long queues in front of the collection centers. The IPO issued by BHPC was worth Rs 48.6 million and that by JSLB Rs 9 million. Due to the increased interest of people in the capital market, BHPC was oversubscribed by nearly 100 times and JSBL by 327 times which is the highest record in Nepal’s capital market history. Only lucky applicants will get the shares as most of the shares will be distributed through lottery.  When such shares will be traded at the secondary market, and if the trading follows the past few years’ trend, per share price will be more than five times of the IPO cost.
Who benefits from over-subscription?
Response to the IPO call shows that people deposited about Rs 4.5 billion for BHPC shares; the company’s balance sheet shows Rs 360.08 million long-term debt at the end of FY 2070/71 for which the company is paying Rs 44.88 million as interest annually. This is 12.46 per cent cost of the company which cannot get any tax benefit for the interest paid either as it doesn’t need to pay tax in the initial years. The public is interested to invest in this company, and may be the company is also interested to use the public fund. But due to the lack of proper regulation neither the public can channelize their funds as investment nor can the company utilize the low-cost public fund. The data shows that the company can provide more than 12 per cent return to the utilized fund which is around the return rate provided by other similar companies.
JSBL’s IPO experience is even better. The company asked for Rs 9 million, but people have deposited about Rs 3 billion for it. Due to the oversubscription, they have to pay more charge for the collection centers, they have to print tens of thousands of share certificates and including the SEBON registration charge of 0.2 percent of the total paid up capital of Rs 20 million; the cost for them would be nearly their issuance amount. Still, they have to pay more for the listing at NEPSE and CDSC. 
From the side of investors, the general investors are also not fairly compensated. In the two IPOs, about Rs 7.5 billion of public money has been deposited. Out of this, only Rs 57.6 million will be utilized as capital which is less than 1 percent of the deposited fund. The remaining 99 per cent will be refunded after nearly two months.  Some seven billion rupees public money is not being utilized. Due to lottery system, only few lucky investors will get the minimum number of shares. 
This situation has even created various wrong practices in the market. Many genuine small investors are cheated due to some investors who collect others’ citizenship certificates to get more shares in the lottery. The only beneficiary of the current IPO system are some investors who can collect large number of citizenship certificates and apply in large numbers to increase the chance to get shares in lottery. After enlistment of the shares in NEPSE, such investors keep on matching the shares in secondary market to get in their own name. This again can distort the real price of the shares in the secondary market.     
The main objective of any capital market is to flow the saving or fund into investable projects as long-term capital, which should facilitate public for savings and getting more on their savings whereas the entrepreneurs should get low-cost funds to materialize their ideas into business. In Nepal’s case, investors are ready to invest in the projects. It is proved by the huge oversubscription. Companies are using higher cost funds but they are not able to utilize the low cost public savings. Funds sourced through Nepali capital market are costlier than those mobilised through other sources. 
Suggestion to Change the Regulation
The IPOs of BHPC and JSLB are not exceptions. Many IPOs have faced similar trend for the last few years. Only few hydropower companies have entered freely in the capital market to raise funds. A large number of companies are in the capital market to fulfill the legal provisions. There may be different causes for other companies not to enter the capital market, but the cost of raising funds in the market and lack of incentive for the entrepreneurs in the regulation are prime causes among them. 
After frequent discussions with different entrepreneurs, SEBON was suggested to change the current “Securities Registration and Issue Regulations, 2008” and make a provision to issue shares in premium. Just few weeks earlier, SEBON drafted a new regulation and posted on its website for public comments. This is a very positive move from the regulator. Actually the draft regulation consists of many aspects which were recommended. It has a provision to issue shares in premium but it is silent on how the premium will be calculated. One more added feature is about pre IPO which can allow companies to raise capital for infrastructure development before their operation. There is also a provision prescribed for issuing bonds in local currency by international institutions. These kinds of provisions will help the capital market to work for its objectives. 
Although the regulation is in the process to collect comments, hopefully it will be finalized to recover all the drawbacks of current regulation. At least it should stop the current IPO trend. It should play a catalyst role to boost the entrepreneurship culture in the Nepali economy. The new regulation should be the basis for the companies in Nepal to get low-cost funds from the capital market. It should also make a provision of incentive for real sector companies to enter into the capital market. Change in a single regulation may not be enough to develop efficient market, but this important regulation can be a milestone in Nepali capital market for the smooth flow of funds from savers to the users.         
The author is asst manager at NEPSE and a visiting faculty at KUSOM.

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