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Investors who bought NLIC at high prices after FPO announcement in distress; Whom to blame: the Company, Regulator, or Investors?

- ShareSansar, January 2, 2017  on Exclusive , Featured , FPO News , Latest , Stock Market
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Securities Board of Nepal (SEBON) has recently given final approval to Nepal Life Insurance Company (NLIC) to float 30.96 lakh units Further Public Offering (FPO) shares. The Board has approved NLIC to issue FPO at Rs 1,425 (premium of Rs 1,325 added to the paid up value of Rs 100). After issuing FPO with premium of Rs 1,325, NLIC will be able to add Rs 4.10 arba in its reserve and surplus account.

Previously in June, 2016 NLIC BOD’s had decided to issue FPO at Rs 2,951 per share but it was later stopped by SEBON due to unclear rules regarding fixation of FPO price. On an expectation of high FPO price, market price of NLIC shoot up as high as Rs 4,936 in NEPSE. If NLIC was allowed to issue FPO at Rs 2,951 that time, Rs 8.82 arba could have been collected in the premium amount.

Later, SEBON set guidelines for fixing FPO price. As per the Board’s procedure to fix FPO price, any company’s FPO price will be determined on the basis of the average market price of the company in the past, present and in the future as well. Any company issuing FPO should initially prioritize four methods; namely:

  1. Capitalized Earnings method
  2. Net Worth Per share/Book Value per Share
  3. 180 Average of Closing market price
  4. Discounted Cash Flow (DCF) method

The final FPO price should be fixed on the basis of the average price derived from above 4 methods.

NLIC Volume
NLIC’s price and volume shoot up exponentially after the announcement of FPO news

Now a big question arises: what will happen to those investors who bought NLIC shares at high price in the hope of NLIC issuing FPO at high price. The price had gone up from Rs 3,445 to Rs 4,900 only in a few trading days. NLIC traded in circuit levels for days before SEBON intervened and suspended its trading. Those investors who bought shares at high price are certainly in great panic. It is very difficult to find out who is the real culprit. Is it the company and board members who disclosed FPO price without any research and prior approval from SEBON? Is it the regulator (SEBON) for not making clear policy regarding issuance and fixation of FPO price? Or is it the fault of investors themselves who blindly bought shares at high prices without accounting for the pros and cons of FPO and its pricing? It is high time for companies and regulators to think about the price sensitivity of any news.

Is the current market price of NLIC still inflated?

Security Board of Nepal (SEBON) allowed NLIC to issue FPO at Rs 1,425. If fixation of FPO price is based on above 4 methods set by the SEBON, then we can regard this price as highly scientific and realistic. Based on this revised FPO price, can we say that the current market price of NLIC trading at Rs 2,800 levels as highly overpriced? Since there is a huge difference between market price and FPO price which was generated using highly scientific valuation model, investors must be in a great dilemma regarding the recent market price. It’s P/E ratio as of January 1, 2017 stands at 252.

Based on the above facts, ShareSansar has tried to list the pros and cons of NLIC FPO to the investors and the stock market as a whole.

Pros:

  1. Nepal Life Insurance will be able to earn Rs. 4.10 arba as a premium amount which will be added to reserve and surplus account. This will help to increase the net worth of existing shareholders.
  2. Premium amount can only be used for distributing stock dividends. So investors can expect huge bonus shares in the future.
  3. The excess reserve fund can be used for expanding company business.

Cons:

  1. There is a huge difference between FPO price (Rs 1,425) and the current market price (~ Rs 2,800) which means that investors who get shares in FPO will be interested to sell to book profit. Supply is expected to rise after listing of FPO.
  2. Investors are expected to accumulate money for applying for the FPO. This means that the investors might be interested to sell shares than to buy in the market. As such, the market might see some increased supply in the coming days due to NLIC FPO.

However, it very important to note that NLIC is an ideal company when it comes to life insurance companies in Nepal, and NLIC is still leading the life insurance industry with its great performance.

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