Initial Public Offerings (IPOs) are pivotal events in a company’s journey allowing it to tap into the public capital market to fuel growth and expansion. In Nepal, the regulatory authority responsible for overseeing IPOs is the Securities Board of Nepal (SEBON). SEBON plays a crucial role in meticulously inspecting, evaluating and approving IPO applications submitted by companies. However, it’s important to note that not every company that applies for an IPO receives SEBON’s approval. In this context, investors are presented with a significant responsibility. With SEBON’s rigorous scrutiny serving as a baseline, investors must conduct their own comprehensive research before making investment decisions. This research includes analysing the financial performance of the company, evaluating the competency and experience of the management team, studying industry trends, and assessing the competitive landscape.
In recent years, there has been a notable surge in the number of individuals opening dematerialised (Demat) accounts. These accounts facilitate the electronic holding of shares and have become a popular choice among investors. Before the Covid 19 pandemic, the number of Demat accounts and applicants for Central Registration Number (CRN) in banks was relatively modest. However, as lockdown measures were lifted, banks witnessed a significant increase in the number of loans being taken out for share purchases. Investors are increasingly leveraging bank loans to participate in IPOs. Currently, there are approximately 1,981,598 Demat accounts in Nepal, highlighting the growing interest in the stock market.
In the first half of 2023, the Asia-Pacific region maintained its position as the global leader in IPO activity. This region accounted for approximately 60% of the total global IPO volume and value. During this period, there were 371 IPOs in the Asia-Pacific region, raising a combined total of $39.4 billion. While this represented a slight decline of 2% in the number of IPOs, the total value decreased significantly by 40%.
Technology, industrials and materials sectors dominated the IPO listings, reflecting the diverse landscape of companies going public. Mainland China, in particular, has been focused on rejuvenating its economy post-Covid lockdown. However, several challenges, including the lingering economic impact of the pandemic, reduced consumer spending power, manufacturing and export hurdles, and escalating US-China tensions, have cast a shadow of uncertainty over the IPO landscape. As a result, many significant IPOs are currently on hold, awaiting more favourable market conditions. Hong Kong, too, has experienced reduced listing activity in the first half of the year, influenced by interest rate hikes and weakened equity prices of IPOs completed in the previous two to three years.
Within the context of Nepal, there have been recent instances of IPOs garnering significant attention and oversubscription. For example, the IPO of Nepal Reinsurance Company was oversubscribed by 1.57 times within just two days of its issuance, even as the Nepal Stock Exchange (NEPSE) index was down by 3.3674% during that period. Similarly, the IPOs of NIC Laghubitta Bittiya Sanstha and Sadhana Laghubitta Bittiya Sanstha saw oversubscription levels of 5.16 times and 16.44 times, respectively.
While the increasing number of IPO applicants is indicative of growing investor interest, it also brings forth its own set of challenges. One prominent issue is the lack of transparency and regulatory oversight in the market. This absence of robust regulations and supervision can lead to concerns about market integrity and investor protection. Additionally, the limited liquidity in the market has resulted in heightened stock price volatility. This volatility has had consequences for investors, including the potential for not receiving expected dividends and the constant fear of incurring losses.
Further, the market continues to be dominated by a few large companies, limiting opportunities for diversification. Additionally, Nepal’s IPO market presents both opportunities and challenges for investors. While there is the potential for high returns, investors must navigate a market with limited liquidity, a lack of regulatory oversight, and concerns regarding transparency. These factors have contributed to a climate skepticism among economic experts and serious investors, underscoring the need for greater transparency, regulation, and investor education in Nepal’s growing IPO market.
In this issue of Business 360, we spoke to a few experts to get their views on this recent trend of IPOs. Excerpts:
Dharma Raj Sapkota
President, Stock Brokers’ Association of Nepal