The darker side behind the IPOs and a neglected rule.

Hydropower IPOs is generally well received and always oversubscribed by many times in Nepal. The phenomenon can be analyzed from two straight dimensions. 

First, we have a lot of spare cash waiting for the right investment opportunity. This can be re-framed as "lack of investment opportunities at all". Second, the established hydropower companies have been able to win the public confidence. The perception towards hydro share is largely positive.

Whatever the reason is, a large number of people are waiting for hydropower IPOs. The page views to my blog are the evidence (my blog gets a fair amount of traffic). More than 80 percent of the total page views come from the IPO analysis although my blog is focused more on unlocking the bottlenecks for hydropower development. 

During IPOs, primary investors are the ones who benefit the most. Interesting it may seem to primary investors, secondary investors, however, have no reason to happy about. The situation for secondary investors might get worse in future if we do not properly enforce the clauses mentioned in the existing Company Act.

This article is about a clause that has been ignored by almost all project developers and even regulatory bodies and a hidden reason why developers are rushing towards IPOs.

Section 89 of Company Act 2006 describes "Circumstances where one is disqualified to be appointed to, or continue to hold, office of director". The clause I want to discuss is under subsection 1(g) of section 89.

It says "person(s) shall not be eligible to be appointed to the office of director who is already a director, substantial shareholder, employee, auditor or adviser of another company having similar objectives or has personal interest of any kind in such company"

On the contrary, most of the hydro developers are director of two or more hydropower companies. Being director in more than two hydropower companies clearly violates the above section as the main objective of hydropower companies is to construct and generate electricity. 

Regulatory bodies and the government have turned a blind eye to this violation. I can understand the unscripted liberty to the developers shown by the government. To end the energy crisis is government's top priority. But, without tightening the screws in the name of "load shedding free nation" is also a wrong idea.

I will present you the actual intentions of developers when it comes to establishing multiple hydropower companies by the same people which may compel you to support my valid arguments.

Exit is the always on top of the list for any hydro developer in Nepal. I would like to remind you that the lock-in period for hydro promoter shares is three years from the date of IPO allotment. Afterward, it can be easily traded in NEPSE without any price discrimination. 

Once the lock-in period is over, promoters (directors) usually sell off a certain amount of shares owned by them with a hefty capital gain and invest in another hydropower company. They control every new hydropower company they establish while controlling the existing companies. 

Now the question arises; what is wrong in it apart from the violation of Company Act?

Before pin pointing the flaws I must say that I am not in a position to restrict exit. If you are given a right to make an entry, your right to exit has to be equally honored. 

Moving to the problems, hydropower projects are variable things where companies have to last forever. The BOOT model has to be well understood. After thirty years of operation, the project has to be handed over to government. In contrast, the company has to operate forever (the basic concept). So each hydropower project has to be considered as a product which has its own product life cycle. 

The long term sustainability of any hydropower organization will totally depend upon the selection, development and operation of new products (new projects).

In such case, conflict of interest is obvious when developer/promoters hold directorships of multiple hydropower companies which will eventually hamper the organization.

In addition, developers' vision is generally restricted to "one project one company". This is where the main problem lies. Growth becomes stagnant when developers ignore the basic fundamentals of BOOT project. 

With government and regulatory bodies remaining silent, the intention of developer is clear. Construct a project, do the IPO, wait till lock-in period is over, sell a certain amount of shares with capital gains and invest that amount in a new hydropower company and finally control both. The concept of wealth maximization does not exist.

Many of us might argue that the addition of any MW(s) by whatever way is a good thing for energy starving country. But the question is not just about adding additional electricity to the national grid; it’s about the long term sustainability of hydropower companies. Except Chilime, no hydropower companies are moving in the right track, I must say. Finally, rules are rules and should be followed. After all, what is the purpose of company act if it is meant to be broken?