Unregulated pre-IPO boom raises alarms in Nepal’s capital market amid SEBON inaction

KATHMANDU: A growing number of companies in Nepal are actively raising capital through pre-Initial Public Offering (pre-IPO) share sales before receiving regulatory approval from the Securities Board of Nepal (SEBON), raising serious concerns about transparency, investor safety, and regulatory loopholes in the country’s financial system.

One such example is Hulas Iron, promoted by the prominent Golchha Group, which is currently selling promoter shares to general investors at Rs 140 per unit through Nabil Investment Banking. The merchant bank has been encouraging potential investors to join early, citing that the company will issue an IPO soon, after which shares will be locked for three years and tradable like public equity. The messaging campaign includes WhatsApp and direct SMS alerts, and positions Hulas Iron—founded in 2020—as a long-term investment prospect. Sharad Golchha, son of industrialist CK Golchha, serves as Managing Director.

The pre-IPO trend is not limited to Hulas. Hotel Siraichuli in Bharatpur is also reportedly planning to issue pre-IPO shares, with Nabil Investment hinting at upcoming offerings. Meanwhile, private investment firms are sending unsolicited messages about companies like Godabari Steel, National Food Bank, and Sangrila Distillery, offering shares at Rs 115–130 per unit with the promise of future high returns post-listing.

This aggressive and largely unregulated pre-IPO fundraising is gaining momentum, especially in hydropower, manufacturing, steel, hospitality, and processing sectors. Companies set inflated prices with added premiums on the par value of Rs 100 per share and raise massive funds before IPO approval.

One prominent case is Laxmi Steels, which earlier this year issued 20 lakh shares at Rs 265 per unit, seeking to raise Rs 53 crore. However, due to low promoter participation (only 3.86 lakh shares subscribed), the remaining shares were sold to the public through pre-IPO channels, resulting in a reported Rs 50 crore collection.

Other firms like Sunrise Holdings (Rs 150 per share), Prabhu Helicopter (Rs 150), Annapurna Cable Car, Ridge Line Energy, Muktinath Cable Car, and Supreme Pharmaceuticals are also in the race to collect funds through similar methods.

A high-ranking official at a merchant bank told Fiscal Nepal that dozens of companies currently awaiting SEBON approval are raising money through pre-IPO placements. He accused the regulator of delays and negligence, forcing companies to circumvent the system by issuing shares under the guise of promoter sales.

“A company applies to issue 20% of its Rs 1 billion capital through IPO, but when SEBON doesn’t respond for years, they raise money from the public under pre-IPO terms. Once SEBON approves, the capital structure changes, causing further delay,” he explained.

Investors are lured with projections that once listed, share prices will skyrocket to Rs 1,500 to Rs 2,500, and after the lock-in period ends, they can exit with significant capital gains. This speculative narrative has increased retail investor appetite, even though the legal foundation for pre-IPOs remains ambiguous.

Prominent investor Tara Phulel has raised red flags, urging SEBON to step in and clarify the legality, risk, and investment accountability of pre-IPO practices. “Where and how this money is being used is critical. If public money is raised, the regulator must ensure it is being handled responsibly,” he said.

Experts like Ramendra Rayamajhi, President of the Merchant Bankers Association of Nepal, warned that the unchecked expansion of the pre-IPO market poses systemic risks.

“In developed markets, IPOs are riskier than secondary trading. Here, the pre-IPO market is now riskier than both. Unlike secondary markets, pre-IPOs are not tested or transparent,” Rayamajhi said.

He emphasized that while IPO shares tend to skyrocket post-listing, if a company fails to issue an IPO or if SEBON enforces strict lock-in rules, investors could be trapped with illiquid holdings.

A senior executive at another merchant bank added that while investors are drawn to pre-IPOs for capital gain, companies often raise this money not for growth but to repay loans or fund working capital, citing IPO delays of up to two years at SEBON.

“SEBON knows what’s happening, but it remains silent because it too is part of the problem,” he alleged.

There are further concerns about misuse of premium amounts. Companies are reportedly collecting premiums of Rs 30–75 per share without properly accounting for them in their financial statements. If this is true, it could amount to investor fraud and tax evasion.

“Investors believe they’re paying Rs 150 or more for quality shares. But if the company doesn’t reflect the premium in its balance sheet, the excess money is just going into promoters’ pockets,” the merchant banker warned.

The lack of regulation and policy clarity on pre-IPOs is now being debated across the capital market. Investment bankers, brokers, and analysts are calling on SEBON to:

-Issue clear legal provisions on pre-IPOs,

-Ban pre-IPO offerings without IPO registration and approval,

-Define who qualifies to raise pre-IPO capital,

-Ensure premium income is reflected in company financials,

-Protect public investors from speculative or fraudulent practices.

SEBON officials privately admit that the surge in pre-IPOs is concerning. “Once a company offers shares to more than 50 individuals, it enters SEBON’s jurisdiction. This was clearly explained in the Supreme Court verdict on the Unity Scandal,” one official said.

However, poor enforcement, lack of transparency, and prolonged IPO approval processes have allowed pre-IPO practices to flourish unchecked. The concern now is whether the pre-IPO boom is quietly laying the groundwork for Nepal’s next financial scandal.