Government Inaction on Pre-IPO Share Scam Criticized

Kathmandu. More than two months have passed since the government was formed under the leadership of Balendra Shah (Balen). During this period, the government has ventured into various sectors.

In some matters, the government has even appeared very 'proactive'. It claims to have moved forward with investigations and prosecutions by arresting various individuals accused of syndicate in government bodies, from clearing settlements of squatters to abolishing political appointments in the name of good governance.

However, the government still appears indifferent to issues directly connected with the public. Cooperatives, which are a strong pillar of the economy, are currently in a dilapidated state. The government has not been able to do anything significant about the embezzlement of trillions of rupees by mafias and political party leaders and cadres. The government, which promised to return the deposits of cooperative victims during the elections, is currently trying to save face by returning only a very small amount.

However, the government has shown indifference in another important sector directly connected to the general public, which is the game of share sales in the name of pre-IPO. This process has been seen to be increasing even more recently.

The country's economy is still not good. Many industries and businesses are closing down, or are barely running at low capacity and at a loss. Businesses that were devastated by earthquakes, the corona pandemic, and the Gen Z movement are now on the verge of collapse due to excessive debt burden from loan restructuring by adding interest in the name of facilities.

On the other hand, due to the low interest rate on bank fixed deposits, individuals and institutions are restless about where to invest their funds. There is more than 76 trillion rupees in deposits in banks and financial institutions. In the stock market, which is an alternative investment medium, more people lose than gain by investing. There is no situation to invest in real estate.

However, taking advantage of this adverse situation, trillions of rupees are being illegally trapped from the public in the name of pre-IPO and premium. Officials say that this work, done with the collusion of some individuals in the Securities Board, the concerned regulatory body, has not stopped yet.

How the Pre-IPO Game Works

Currently, due to excess liquidity, intermediaries are running the pre-IPO business by taking advantage of the reduced interest rates and the sluggish stock market. It is said that famous businessmen themselves are involved in this business for the recovery of their businesses after they suffer losses.

Currently, the return on fixed deposits is less than 4 percent, which is even less than the annual inflation. Similarly, there have been continuous losses in secondary market share investments. Although the market index appears stable due to some companies that have issued IPOs, investors in large and famous companies are still at a loss.

On the other hand, the slowdown in real estate transactions has also halted investment avenues. In this situation, those who are unable to do business themselves are looking for places to invest.

Taking advantage of such opportunities, various companies have now started the business of selling promoter shares.

According to this, they are made to invest in promoter shares. They are lured with promises of issuing IPOs immediately, increasing the price, and the value multiplying 6-7 times after the lock-in period opens after three years. Stakeholders say that in this greed, the general public is eager to invest without looking at the actual condition of the company.

For this, first, the agenda of IPO is taken to the general meeting. Publicity is done, and even if the conditions for issuing shares to the public are not met, agreements are made with the capital market, and promoter shares are started to be sold to the public at a premium through commission agents.

Sources claim that some individuals within the regulatory body, the Securities Board of Nepal, are also assisting in this. Specifically, they say that millions of rupees are taken as bribes for facilitating a company into the IPO process pipeline. By showing that it has entered the pipeline, it becomes easier to sell shares, and they pay bribes to get it into the pipeline.

Currently, there are more than 90 companies in the Securities Board's pipeline. However, board sources say that some of the companies in this pipeline are not even eligible for IPO approval. They say that some companies are not even in operation, and some are in a loss-making state. These shares are said to be sold for 150 to 200 rupees.

Provisions of the Company Act and Securities Regulations

Section 29(1) of the Company Act, 2063 BS, provides for the issuance of shares at a premium price. This section states that a public company can issue shares at a premium price if it fulfills the conditions mentioned in the prevailing securities laws for issuing shares to the public.

Along with this, the same section provides for a private company or a company that does not wish to make a public offering under securities law to issue shares at a premium price with the approval of the general meeting if its assets exceed its liabilities. It is mentioned that the premium amount received from the sale of shares at a premium price must be deposited in a separate account and spent only in areas specified by law.

Section 29 of the Company Act, 2063 BS, appears to distinguish between companies issuing shares to the public and private limited companies and public companies not wishing to issue shares to the public. The first category of companies must issue shares at a premium according to the prevailing securities laws, i.e., the Securities Act, the Securities Registration and Issuance Regulations, 2073, and the Directives, 2074.

Private limited companies and public limited companies not going public are placed in the second category, and they can sell shares at a premium with the approval of the general meeting if their assets exceed their liabilities.

Now let's look at the provisions of the securities laws regarding the issuance of shares at a premium.

Section 25 of the Securities Registration and Issuance Regulations, 2073, provides legal provisions with six conditions for issuing securities at a premium.

These include the company operating with net profit for three consecutive years, net worth exceeding paid-up capital, the general meeting deciding to issue shares at a premium, having an expert valuation report justifying the issuance of shares at a premium, compliance with the premium determination provisions mentioned in the directives, and obtaining a credit rating grade above average.

Section 25(b) of the same Regulations, 2073, allows listed companies to issue additional public offerings of securities at a premium, not exceeding the net worth per share according to the latest audited financial statements of the institution.

Section 36(1) of the Securities Registration and Issuance Directives, 2074, mentions the method of calculating the premium for issuing shares at a premium, and provides the facility to issue shares at a premium twice the net worth per share.

New companies can use this facility only when issuing initial shares. Section 37 of the same directive states that if additional shares are to be issued at a premium, it should not exceed the net worth per share.

Role of the Securities Board and the Collusion Game

In Nepal, the Nepal Securities Board (SEBON) is the sole official body responsible for registering securities (shares) of industries and businesses, granting permission for public offerings, and giving final approval for premium pricing.

For this, the 'Securities Registration and Issuance Regulations, 2073' and 'Directives, 2074' have set clear criteria. However, where laws and regulations are silent, the officials of the board are found to be grossly misusing their discretionary powers.

Share sales can be viewed in two phases: first, the stage after applying for IPO approval at the Securities Board, and second, the stage before applying. Currently, the public is being defrauded of billions of rupees in the name of premium in this second stage.

Section 29 of the Company Act, 2063 BS, allows companies that do not wish to go to the Securities Board to issue shares at a premium after getting approval from the general meeting if their assets exceed their liabilities.

However, the act does not clearly specify the transparent process for determining the premium. Taking advantage of this legal loophole, intermediaries and industrialists-businessmen are selling promoter shares at high prices to the public by creating a buzz about going public.

The reality is that companies with negative net worth, burdened by excessive bank loans, industries that have been closed for years or are operating at very low capacity are also dreaming of IPOs. Hydropower projects, hotels, manufacturing industries, media houses, pharmaceutical companies, and cable car companies, which will not be able to pay dividends to investors for the next five to ten years, have also laid traps to ensnare the public.

Silence of Regulatory Bodies and Misuse of 'Pipeline'

The Office of the Company Registrar evades responsibility by saying securities laws should handle it, and the Securities Board claims 'it hasn't been registered with us,' making this sector like 'no man's land.' Those who loot are openly looting, but there is no one to regulate them.

What is even more ironic is that the IPO pipeline or application list that the Securities Board posts on its official website has become the main weapon for these intermediaries to defraud the public. As soon as a company's name is included in this pipeline, its market price is artificially inflated.

For example, shares of a loss-making company that are difficult to sell even at 100 rupees per share (face value) are sold for 200 to 300 rupees after appearing on the board's pipeline.

If a weak company manages to sell an additional 2.5 million promoter shares at 200 rupees just by applying for IPO approval, it collects an additional 250 million rupees. Even if 50 million rupees are set aside for agent commissions and other expenses, the directors and intermediaries make a direct net profit of 200 million rupees.

High-ranking officials of the Securities Board have fallen for this huge sum of money. They do not easily register IPO applications until the commission and bribe bargaining is settled. Only after the deal is struck does the file move forward. The internal reason for hundreds of files being stuck at the Securities Board is this financial manipulation.

Just as billions of rupees of the public have been lost in cooperatives, in the same way, trillions of rupees of the public are at risk under the guise of pre-IPO. Investors are wondering why the current government, with a clear mandate to control corruption and ensure good governance, is not paying attention to such large-scale institutional fraud.

Illegal Premium: Can the Money Be Refunded?

The public has been lured with sweet promises like 'invest now, and its value will increase five to six times after the three-year lock-in period ends,' and premiums have been collected. The Nepal Securities Board has the full legal authority to stop such illegal activities.

When a company reaches the board for final approval of share issuance, the board must meticulously investigate those companies. How many additional shares did the company sell before applying? How much premium was collected?

Is the collected premium amount deposited in the company's bank account? Was the company's assets truly greater than its liabilities according to the Company Act? Did the general meeting make a legal decision to collect the premium? The board has the responsibility to find answers to all these questions.

If, during the investigation, it is found that the premium was collected in violation of the law, or if the amount did not reach the company's account, the board can and must immediately stop the registration process of such companies and ensure the refund of the premium amount collected from the public. It is imperative for the current government to take strict action in this regard.

However, the opposite is happening here. High-ranking officials of the board itself are found to be involved in registering through collusion, indirectly supporting the arbitrary collection of premiums, and then quietly removing the names of such companies from SEBON's application list after the money has been collected.

Fearing that they themselves will go to jail, they do not want to refund illegal premiums. The fact that the current government remains silent despite so much evidence appearing in the media and the collusion of the Securities Board itself is a matter of serious concern for the general public.

Measures to Stop Pre-IPO Scams and Protect the Public

To prevent such fraud, clear legal provisions and their transparent implementation are most important. While it is natural to raise capital through share sales for the development and expansion of industries and businesses, the primary responsibility for organizing this lies with the Securities Board.

The Securities Board must be honest and capable to stop the practice of selling shares of weak and flawed companies under the guise of pre-IPO, arbitrarily setting premiums, and misusing the collected funds. The following steps must be taken immediately to control this.

1. Clear Policy and Public Notice: The board should publish public notices regarding the conditions that companies and capital markets must fulfill before applying for IPO registration, preparations and procedures to be carried out before public offering, and implement strict policies and regulations.

2. Strict Monitoring and Refund of Funds: It should be ensured that companies applying for IPO approval sell shares only in accordance with the Company Act and Securities Regulations. If it is proven that premiums were collected in violation of the law, a mandatory provision should be made to refund the amount to the public before approving the share issuance.

3. Investor Awareness: The government and regulatory bodies should widely inform the general public about the risks of blindly investing in pre-IPOs of weak and non-performing companies.