The Nepal Weekly 
September 10, 2024
By Sharmila Thakuri
President, Female Economic Journalists Association
(Contd. from last issue)
Furthermore, some companies like Himalayan Reinsurance have even lobbied regulatory bodies to amend existing laws in order to raise funds from the public. Initially, the company proposed to invest Rs. 7 arab from the founders and raise the remaining Rs. 3 arab from the public out of a total paid-up capital of Rs. 10 arab. However, the founders influenced state mechanisms to amend the ‘Securities Registration and Issuance Regulations, 2073’, and issued primary shares at a price of Rs. 206 per share. This allowed the company to collect Rs. 6.18 arab from the public, more than double of what was initially laid out. The rule requiring a company to be profitable for three consecutive years to issue shares at a premium was also amended to two years to facilitate this company. Himalayan Reinsurance, chaired by Shekhar Golchha, also includes other well-known investors like Kailash Sirohiya of Kantipur Publications, former president of the Federation of Nepalese Chambers of Commerce and Industry, Pashupati Murarka, Sahil Agrawal of the Shankar Group, and businessman Deepak Bhatt.
Share market analyst Mukti Aryal states, “Influential business houses manipulate the system to issue IPOs at premium prices. This leads to ordinary people getting trapped while the operators benefit.” Former Executive Director of Nepal Securities Board, Niraj Giri, claims that recently, companies have been using loopholes to raise as much money as possible under the guise of IPOs. Aryal also accuses influential business groups and elites of raising money as they please through IPOs by manipulating the Securities Board. He says, “People with political influence are changing policies and exploiting legal loopholes to harm the general public.” Aryal further states that if a company provides false information after issuing an IPO, the operators and the certifying chartered accountants should be punished.
According to Section 97 of the Securities Act, 2063, providing misleading information to the public is considered an offense, with penalties ranging from a fine of Rs. 1 lakh to Rs. 3 lakhs or imprisonment for up to two years, or both. However, the Securities Board remains silent even when the information presented in the prospectus differs significantly from reality. Market analyst Aryal argues that the penalties and imprisonment periods mentioned in Section 97 are too low, encouraging companies to defraud the public. He says, “Even if arabs of Rupees are defrauded through an IPO, the fine is only Rs. 3 lakhs, so it’s necessary to increase the fine and imprisonment duration.”
Dr. Navaraj Adhikari, spokesperson for the regulatory Nepal Securities Board, explains that the board approves IPOs because all details are certified by chartered accountants and the responsibility of the shares lies with the underwriter. However, the Securities Act, 2063, also provides the board authority to compensate the public for any losses caused by company fraudulence, but power is yet to be exercised. Nor has the board ever recommended that any chartered accountant be punished by the Institute of Chartered Accountants of Nepal (ICAN) for financial misrepresentation.
According to Directive No. 30 of the Securities Issuance and Distribution Directive, 2074, IPOs must be distributed at a minimum of 10 shares per applicant. This provision makes it easier for small investors to buy at least 10 shares and sell them at double the price in the secondary market, leading to the over-subscription of any IPO, explains market analyst Jyoti Dahal. He adds, “The possibility of selling in the secondary market at double the price leads to the over-subscription of any IPO, allowing promoters to collect as much money as they want.” Dahal suggests that setting a separate allocation rule, along with the provision that allows applying for up to 5% of the amount issued for the IPO, could reduce such manipulation.
No Dividends, High Prices
Out of 248 companies listed on the NEPSE, 73 companies have not distributed dividends to investors yet. Despite this, their average price per share is Rs. 557. “Before investing, the financial health and returns of the company are studied,” says Adarsh Bajgain, DGM of Nabil Bank, “But why is investment happening in companies that do not give returns? I have never understood this.” Among the 73 companies yet to distribute dividends (see table), most are promoted by large business houses. “Since they don’t have to pay dividends or interest, large business houses are focused on raising money through IPOs,” comments market analyst Aryal.
Companies that have not distributed dividends so far include well-known companies such as Chandragiri Hills, promoted by IME Group; Panchakanya Mai Hydropower Limited, promoted by Panchakanya Group; Modi Energy Limited, associated with Pashupati Murarka; City Hotel Ltd., associated with Golyan Group; Green Venture Limited, associated with Shanghai Group; and Himalayan Life Insurance, associated with Shankar Group.
According to the Securities Registration and Issuance Regulations, 2073, the founder shareholders of any hydropower company can sell their shares three years after the IPO. Koirala, however, points to the fact that founders are taking advantage of this provision by pulling out their investments after three years and leaving the company in disarray. Former Executive Director Giri also argues that hydropower founders should not be allowed to exit right after the stipulated three years.
Furthermore, Nepal Securities Board’s lax approval of IPOs for any company is putting public investments at risk. Currently, some investment companies, hospitals, warehouses, and trading companies are also issuing IPOs. Giri says that the board’s failure to regulate these companies properly is causing significant risk in the market. A high-ranking official at the Nepal Stock Exchange, who requested anonymity, says, “What can happen with a trading company? It makes a profit from the margin on buying and selling goods. If it incurs a loss, the directors will simply leave the company. Why did the board allow such companies to issue IPOs? I have never understood this.”
Another example of a company allowed to raise funds without considering its condition and financial status is Emerging Nepal. The Nepal Securities Board granted Emerging Nepal permission to issue an IPO on 9th Magh 2078 (January 23, 2022) while Under-Secretary Shobhakant Paudel of the Ministry of Finance was acting as chairman. Paudel himself was a member of the board of directors of the company as it had government investment. However, as chairman of the regulatory body, he granted permission for Emerging Nepal to issue an IPO. According to a high-ranking official at the Securities Board, the company was being run by just one employee. He asks, “How can we guarantee that such a company will protect investors’ interests?” The official further reveals that permission for the IPO was granted under extreme pressure from the then Minister of Finance and the board’s chairman. Emerging Nepal, which claims to facilitate public-private partnership projects, has minimal government investment (less than 0.5%). After Emerging Nepal received permission, the Securities Board has not been able to prevent other similar companies from issuing IPOs of their own.
Former Chairman of the Nepal Securities Board, Rewat Bahadur Karki, amended Rule 9 of the Securities Registration and Issuance Regulations, 2073 to allow companies in the real sector to issue a minimum of 10% to a maximum of 49% of their shares to the public, after companies in the real sector did not enter the secondary market. Previously, the provision required a minimum of 30% of shares to be issued. With the new provision allowing the issuance of only 10% of shares, the rule has been misused, opening a path for companies to deceive the public and raise funds. This is because, under this system, the previous requirement of having at least three directors from the public has been changed to just one director. Additionally, with fewer shares available in the market, there is also an opportunity to manipulate and inflate the share price. For example Chandragiri Hills Limited has issued only 10% of the shares for the public, resulting in all but one of its directors being from the IME Group.
Share market analyst Aryal points out that the responsibility of protecting public investments lies with the Securities Board, and the board should act as a watchdog. “If there are doubts about the financial statements presented by any company, the board should re-evaluate them.” “The undue influence of companies should not overshadow the regulator’s duty to oversight,” he argued.
