SEBON board in confusion: Conflicting Directives from Finance and Public Accounts Committees on Net Worth Criteria

KATHMANDU: The Securities Board of Nepal (SEBON) is caught in a dilemma over whether to allow companies with a per-share net worth below 90 to issue Initial Public Offerings (IPOs). Conflicting directives from the Parliament’s Finance Committee and Public Accounts Committee have left the board in a state of uncertainty.

On May 5, SEBON removed 14 companies from the IPO pipeline, 13 of which were excluded due to having a per-share net worth below 90. Applications from companies with net worth below this threshold have consistently been rejected.

Companies that underwent lengthy processes to seek IPO approval are dissatisfied after being removed from the pipeline and asked to restart the process. SEBON cited a letter from the Public Accounts Committee, which on December 27, 2023, directed the board not to permit IPOs for companies with a per-share net worth below 90.

The Public Accounts Committee has also been seeking updates on compliance with its directive. Following this instruction, SEBON has not granted IPO approval to any company with a net worth below 90. On May 12, the Finance Committee sent a letter to SEBON stating that there is no legal provision to bar companies with a net worth below 90 from issuing IPOs and urged the board to proceed as per existing laws.

The conflicting letters from the Finance Committee and the Public Accounts Committee have put SEBON in a bind. A board official stated that they have sent another letter to the Finance Committee, highlighting the discrepancy between the two directives. “We’ve sent a letter to the Finance Committee with details, as the instructions from the Public Accounts Committee and the Finance Committee do not align,” the official said. A decision will be made only after receiving a response from the Finance Committee.

“Ignoring either parliamentary committee is not an option, but the contradictory directives have created confusion,” the official added, emphasizing the need for alignment between the committees.

Ganesh Karki, president of the Independent Power Producers’ Association, Nepal (IPPAN), argues that hydropower companies should not be barred from issuing IPOs even if their net worth is below 90. He cites legal provisions requiring hydropower companies to allocate shares to project-affected local communities, which cannot be challenged. “There is a legal requirement to issue a certain portion of shares to the public,” Karki said. “No one should obstruct this legal provision.” He warned that barring companies with a net worth below 90 from raising capital through public offerings could hinder investment in the hydropower sector.

Currently, there are no clear criteria specifying which companies can or cannot issue IPOs. This has led to growing calls for the Public Accounts Committee to reconsider its stance. Dr. Gopal Bhatt, a capital market expert, stated, “SEBON, as the regulator, should establish clear guidelines on which companies can issue IPOs, which cannot, and how the raised capital can be utilized. Setting such standards is not the role of the Public Accounts Committee, nor does it have the expertise for it.”

However, irregularities in IPO issuances are rampant. Many companies are issuing shares not for legitimate business purposes but with the intent to profit from share sales. SEBON is currently preparing to amend the Securities Registration and Issuance Regulations to set stricter criteria to prevent substandard companies from entering the market. Discussions are underway to include net worth as one of the indicators in these criteria.