Going public

The Prospects and Problems in Becoming Publicly Listed Companies

the HRM
A few years ago, when the initial public offering (IPO) market was booming in India, investors used to say jokingly that “Even pani puri sellers will raise funds from the public.” Such was the IPO frenzy in the now world’s fifth largest economy that even companies with small capital were attracting retail investors in huge numbers.

Nevertheless, the mania didn’t last long as many high-profile startups failed miserably soon after getting listed on the stock market. Investors have lost money on 40 percent of the fresh IPOs in 2022, according to Indian media reports. Lately, many companies listed this year in India are trading below their issue price.

In Nepal too, there has been increased attraction among private companies to get publicly listed in recent years. Particularly, after the bull market that started after the end of the first Covid-19 lockdown in the country in 2020, companies flocked to issue IPOs not only to raise money from the general public but also to help shareholders reap massive financial gains from the sharp rise in share prices. Though the bull market has ended after restrictions imposed by the Nepal Rastra Bank a year ago followed by a deepening economic slowdown, many companies are in the process to get approval from regulatory bodies such as the Securities Board Nepal (SEBON) to issue shares to the public, whereas many have already received approval and their IPOs are in the pipeline.

According to the Office of the Company Registrar (OCR), the number of companies converting from private to public limited companies for increasing capital has almost doubled in the fiscal year 2021/2022.

“It is a good thing that private companies are converting into public companies to raise capital. However, if there is no proper monitoring, the investments of the public would go in vain,” said Mukti Aryal, a capital market analyst. “In India, investors lost their money as they invested on a whim. As the regulatory mechanism is weak in Nepal, investors may also suffer here.”

According to OCR, 75 companies converted themselves to public entities in FY2021/22, up 87 percent from 40 in FY2020/21.

Existing rules and regulations require private companies to have a minimum of Rs 10 million in their paid-up capital and at least seven shareholders in order to issue IPO.

Jyoti Dahal, an advocate and expert on capital markets, sees the lucrative opportunities in terms of capital gains in the secondary market for promoters and other shareholders as the primary reason behind private companies converting into public. “It is good that companies can collect funds from the public and improve their financial capability. But as regulatory oversights of bodies like Securities Board Nepal (SEBON) is weak, the investment of the ordinary people is at risk,” said Dahal.

He further explains how investments of the public in the listed companies are at risk. “Sebon has allowed companies to sell only 10 percent of shares as IPO to the public. If a company has Rs 50 million in paid-up capital, it can issue only 50,000 units of IPO at a face value of Rs 100. Promoter shares of companies have a lock-in period of three years post-IPO, after which such shares can be converted into ordinary shares. After three years, the public will have only 50,000 shares, while the promoters would have 90 percent shares of the company. Hence, the promoters can easily manipulate the stock price,” said Dahal, adding that the government, in a way, has licensed companies to manipulate the stock market, and earn money.

Experts agree that the attraction among promoters to covert their enterprises into publicly listed companies is not wrong given that the stock market possesses big opportunities for the growth of the companies as well as the wealth of investors.

However, regulatory oversights need to be strengthened and made effective so that there are fair practices in the market. “The companies going public should float at least 30 percent of their shares in IPOs. Likewise, the paid-up capital requirement for public companies is also very low,” said Dahal.

Due to the weakness of regulatory bodies, the Nepali stock market is rife with malpractices. In the past, big investors with their hold on the company’s management gradually led companies to collapse and swallowed the investment of small investors. To name a few, Necon Air, Hetauda Leather Factory and Indreni Soyabean, are among the companies that were delisted from Nepse allowing the promoters of the firms to flee leaving thousands of investors in a disarray. In 2002 and 2007, Nepse delisted a total of 38 companies rendering nearly Rs 1 billion worth of their shares worthless.

“In Nepal, the stock market regulator doesn’t even monitor if listed companies published their financial reports and hold their annual general meetings (AGMs) on time. In such a situation how can we expect the regulator to work for the safety of the money invested by the general people in the stock market?” questioned Dahal.

In the case of companies with low paid-up capital, the firms can issue IPOs and can convert their promoter shares to ordinary shares. Stock market experts say this arrangement also provides big room for manipulation in the stock market. “At present, the face value of shares of most of the companies listed in Neose is Rs 100. Even if it doubles to Rs 200, which is very likely, it is a bonanza for promoters of the companies in just three years. At a time when more and more people are investing in stocks, the authority needs to analyze every possible loophole,” said Dahal.

As per the existing law, companies have to wait a year to issue an IPO after converting to public companies.

Economist Keshav Acharya thinks that the conversion of private firms into public companies increases transparency. “Private companies don’t have to publish reports, unlike public companies. Once companies are public, regulators can properly monitor them. And risks such as tax evasion ends as a result of increased transparency,” said Acharya.

He is of the view that strong and effective regulatory oversight is needed to safeguard investments of the general public.

“For instance, all banks are publicly listed companies and people trust them because there is strict monitoring by the Nepal Rastra Bank. Investors know they will get a good return from investing in shares of banks,” said Acharya.

The Bank and Financial Institution Act 2017 allows banks and financial institutions to set aside at least 30 percent of their total issued capital for subscription by the general public, meaning promoters can own up to 70 percent. The Act allows promoters to sell their shares five years after the commencement of operations.

The lock-in period of BFIs and insurance companies is perfect, and this arrangement needs to be replicated for companies in other sectors, experts say. Bank promoters can only convert their shares into ordinary shares after 10 years, and insurance promoters have to wait for five years. “There is a risk that companies might trick investors and flee as monitoring authority is weak in Nepal,” Acharya said.

It is not mandatory for companies that have conversed from private to public to issue IPO. However, an increasing number of companies from diverse sectors are going public at present.

Companies like Loop Network, Bandipur Cable Car and Tourism, Music Nepal and Shivam Holdings, among others, are already planning to issue IPOs.

Likewise, Taksar Pikuwakhola Hydropower, MeroJob dot Com and Bikash Hydropower Company have already appointed issue managers for IPO purposes.

Although the number of companies converting to public entities is rising, data show private firms registering as public companies are declining in numbers. According to OCR, the number of newly-registered public companies has decreased by 46 percent in FY2021/22 compared to FY2020/2021. As many as 123 new public companies were registered in FY2020/21. But last year, only 67 new public companies were registered.

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