Hydropower promoter shares: A quick guide

I have been receiving tons of emails lately. People are asking me whether or not I should invest in promoter shares. Well, I don't want to list the projects here but a lot of hydropower companies are inviting general public to invest in promoter shares informally.
 

The investment decision for any individual can be extremely difficult when there are hundreds of hydropower companies keeping eye on general public to raise the required equity through private placement. It is really tricky.

Before pinpointing what investors should look for, here is why people are drawn towards hydropower promoter shares (mainly small investors)

Three years lock-in period:- One can sell their promoter shares just like any other public shares after three years from the date of IPO allotment. And there will not be any price discrimination. Just to remind you that the promoter shares of BFIs cannot be traded easily and the price you actually get is way too low compared to its counterpart (public shares).

Amount of shares:- Everyone knows the amount of shares you get when you apply in the IPOs. It is really depressing. Unlike IPOs, you can buy whatever number of shares you want to (pretty much) in case of promoter shares. There won't be any allotment process. It is straightforward.

I guess, these are the main attractions of hydropower promoter shares and if you are someone who is looking for a massive capital gain and do not mind waiting for three years, hydropower promoter shares can serve you well. At least, this is what recent market trend is suggesting.

If you fall under this category, here are some tips while investing.

1) Requirement for IPOs:- A company can issue public shares (or IPOs) during construction. The sooner the company floats its public shares the better for the investors (Promoter shareholders). The countdown (three years look in period) actually begins right after the allotment of the general IPOs. However, there are certain conditions to be fufilled for the IPOs issuance. Make sure the company has already fulfilled the following obligations (or very close).

According to Securities Board of Nepal (SEBON):- If the corporate body making public issuance other than a Bank, Financial Institution or Insurance Company, it shall be required to complete the conditions as follows:-

(a)The Company is required to complete one year of initiating necessary works required for operation of business under its objectives,

(b)Have completed Audit and Annual General Meeting as per the regulations,

 (c)If the Corporate Body has to obtain approval, license or consent from anybody pursuant to the prevailing laws, it is required to have obtained such approval, license or consent,

(d)Have purchased or managed through other means, the land required for the Corporate Body and have initiated construction works of factory building, office building, warehouse and other necessary amenities.

(e)If it is required to select the manufacturing technology and purchase necessary mechanical equipment required for the industry, should have initiated the purchasing procedure,

(f)Should have concluded financial closure for the construction of the project,

(g)If it is a corporate body manufacturing hydropower, it should have concluded Power Purchase Agreement and have called tender for construction of Powerhouse and other infrastructure.

(h)Should have agreed to maintain the loan and capital ratio of the Company throughout the project construction period as it is prescribed by the Securities Issuance Directives.

(i)The share amount as agreed by the promoters should have been paid in full.

In short, the minimum criteria for IPO issuance are statutory approvals like PPA & Generation license, financial closure, land acquisition, award of contract for civil works, selection of electro-mechanical equipment, completion of support facilities like access road, camp-house & warehouse at the project site

2) Private or Public Limited:- Unfortunately, most of the hydropower companies that are taking promoter shares are private limited companies. A private limited company cannot do IPOs by the way. Be informed that it requires one year completion of conversion (from private limited to public limited). Try to go for the limited companies if you are in rush :)

3) Project Status:- You can either invest in the early stage or in the later stage (if you are lucky). Waiting for ages to get the benefits is not everyone’s cup of tea. Having said that, finding a shovel ready project is extremely difficult. Below is the rough idea about the time required for the completion of lock-in period

a) Project Survey License to PPA = 5 years (at the earliest)

b) PPA to Financial Closure = 1 year

c) Financial Closure to IPO allotment (if the company is the limited company and wants to be listed in NEPSE asap) = 1 year

d) IPO allotment to completion of lock-in period = 3 years.

Be informed that the company cannot take promoter shares (technically) as soon as it starts the IPO process. “Do your own math” and decide yourself when you want to make the entry.

4) Other requirements for actual trading in NEPSE:- Although three years lock-in period is the main requirement, there are some other conditions of SEBON. According to SEBON, the shareholders other than public (i.e. promoter), having fulfilled the time frame  (3 years from the date of IPO allotment) intend to offer their securities to the public shall have to fulfill one crucial condition. i.e., the company has to be in operation with a record of positive net profit during, at least, three out of last five years and shall require having net worth per share more than paid up value per shares. So, technically it is more than 3 years for hydopower projects that do IPO during construction.


5) Developers' Background:-Not every can construct hydropower projects. I have seen few developers who want to sell the project completely even after the financial closure. Lack of project construction experience and willpower can easily deviate the initial goals.

6) Financial Projection:- At the end of the day, the share price depends upon the financials of the company/project. Always go through its financial projection carefully and check yourself if they are accurate or not. I had written what ideal project should be for the investment while ago. It is still relevant. Please click here.

7) Price:- Paying premium for promoter shares (to the company) is totally out of the question. You should not pay more than Rs. 100 per share.