Sebon delays approval of Upper Tamakoshi IPO

The minimalistic regulations regarding the Initial Public Offering (IPO) management keep stirring up confusions in the capital market and this time lack of functional clarity might delay the approval of Upper Tamakoshi Hydropower’s issue worth two-and-a-half billion rupees.

The hydro project that had applied for approval for its IPO at Securities Board of Nepal (Sebon) — capital market regulator — in August, has not yet been granted approval. As a first phase of raising 49 per cent of capital through share issuance, the project has planned to issue 25.4 million unit shares allocated to locals residing in the project affected areas and employees of the promoting institutions.

However, Sebon is hesitating to give a green signal to the IPO as Citizens Investment Trust (CIT) — the issue manager — is also one of the promoters of Upper Tamakoshi Hydropower Project Ltd. CIT owns two per cent stake in the 456MW hydro project, which is Nepal’s first hydro project with hundred per cent domestic investment.

“We at Sebon are concerned about CIT’s role in the issue. We fear that there might be some sort of clash of interest as CIT employees who subscribe for the shares will be the ones who will process the applications and allotments,” informed spokesperson for Sebon Niraj Giri.

Fifty-one per cent stake of Upper Tamakoshi with a paid up capital of Rs 10.59 billion is owned by its promoting public entities with 41 per cent held by Nepal Electricity Authority. Nepal Telecom (NT) has six per cent stake, and CIT and Rastriya Beema Sansthan (RBS) each have two per cent stake in the company.
Likewise, 10 per cent of the capital will be raised by issuing shares to locals of Dolakha district that houses the hydro project and 15 per cent will go to the general public through another round of IPO.

The project that has obtained loans worth Rs 10 billion from Employees Provident Fund is supposed to raise some 17.28 per cent of the capital by issuing shares to EPF’s depositors and some 6.72 per cent of shares will be issued to employees of EPF, CIT, NT and RBS.

“At present, we are assessing how much stake will CIT employees get and whether they will be able to influence the IPO and its result, and then we will decide,” pointed out Giri.

However, CIT’s merchant banking arm is assured that this matter will not further delay the IPO approval. “We are constantly in touch with Sebon officials and any confusion will be clarified is there
is any issue,” pointed out head of CIT’s merchant banking unit Narayan Ghimire.

“Back in 2010, when CIT had signed the financing deal with the hydro project, the contract had agreed to appoint CIT as issue manager of the project’s subsequent public offerings,” he added, hoping that Sebon will grant the approval within the next fortnight.

Moreover, due to the shortsighted regulation, Sebon is not in a position to refuse CIT’s involvement as the issue manager despite the fear of a clash of interest. The Securities Businessperson (Merchant Banker) Regulation 2008, which governs issue managers, does not have any clause that addresses the current situation.

In addition, CIT is the only merchant banker that can fulfil the underwriting requirement for the issue as large as that of Upper Tamakoshi. Each public offering requires an underwriter that has to buy the
unsold shares if the issue is not fully subscribed. The underwriter has to be able to buy up to half of the offering, so for an issue as big as that of Upper Tamakoshi’s first phase, the underwriter needs to have enough funds to mop up shares worth Rs 1.25 billion.

Furthermore, the regulation for merchant bankers has completely forgotten to clarify the responsibility of the underwriters that had stirred up quite a confusion back in 2012. Then, Lotus Investa Finance’s IPO worth Rs 80 million was able to raise a mere Rs 11.31 million from the public. The issue manager and underwriter — Civil Capital — that had agreed to purchase 50 per cent of the issue in case of under-subscription refused to do so. Instead, it offered to annul the IPO and return the amount it had raised to the public.
The dispute dragged on for months with Sebon unable to take any action against the underwriter that refuses to mop up unsubscribed shares against the contract. The Merchant Banking Regulation 2008 does not have any mention of consequences in case of such refusal by the underwriter. Back when the regulation was introduced, IPOs used to get oversubscribed by many times so the regulator did not imagine a scenario of under-subscription, thus, failed to enforce the underwriting stringently.

“There is a lot of ambiguity in the merchant banking regulation especially in terms of underwriting,” pointed out CEO of Nabil Invest — one of the active merchant bankers — Pravin Raman Parajuli.
“There are no clear rules about the ceiling for underwriting the issue, but we have an understanding not to underwrite an offering that is twice the size of the company’s paid up capital,” he added.

Source : The Himalayan Times