5-YEAR CAPITAL MARKET DEVELOPMENT MASTER PLAN: Sebon seeks revocation of forcible IPO provision
KATHMANDU, AUG 14 -
Stating that the current provision that forces banks and financial institutions (BFIs) to offer public shares distorted the capital market, a five-year master plan prepared by the Securities Board of Nepal (Sebon) has suggested that BFIs should not be forced to make public offers.
“They (BFIs) should be free like other businesses to raise finance as per their requirement,” states the master plan prepared with the assistance of the World Bank which has been floated for pubic discussion. As per the Bank and Financial Institution Act, BFIs are compulsorily required to offer at least 30 percent stake for the public within two years of acquiring license. Now, the central bank has allowed them to increase it to 49 percent.
The plan says that such a provision has brought distortion in the capital market resulting in dominance of the financial sector. The number of listed non-financial companies is just over 30. “The provision leads to oversubscription and investors tend to borrow loans for purchasing the subscriptions in the primary market instead of involving in the secondary market where trading is very thin,” it says. “The provision restricts the extent of public participation anyway.”
Forcing a company to make public offers limits the benefit only to those who happen, by good fortune, wealth, or otherwise, to acquire shares, says the plan. It says there is no reason why the public should have any better right to participate in the profits of banks than those of any other company. “Forcing a company to make public offer raises the cost of capital,” it says.
Nepal Rastra Bank (NRB) officials, however, say the suggestions of the master plan were not based on the ground reality. “The provision of compulsory public issue was made to enhance public scrutiny as BFIs use public deposits,” said Bhaskarmani Gyawali, spokesperson for NRB. “BFIS and other companies cannot be put into the same basket.”
However, Sebon Chairman Subir Poudel said forcing BFIs to go public will not guarantee the safety of public deposits. “It is the duty of the state and the central bank to ensure the safety of public deposits in BFIs licensed by NRB,” he said.
Similar was the view of Ashoke Rana, president of Nepal Bankers’ Association. “The participation of two public directors in banks’ board for 30 percent public stake does not guarantee public scrutiny,” he said, citing recent cases of banking frauds committed by promoters of some listed FIs.
The proposed master plan has stated that besides the compulsory provision of public issuance, the rules on pricing—such as public offers should be made at face value of Rs 100 per share regardless of the market value—and provision of promoters requiring to retain at least 51 percent shares in BFIs have distorted the capital market. “These provisions must be removed to rebalance the supply of securities by attracting more companies to the market,” it states.
The plan suggests that those willing to come into the capital market should be allowed to fix the value of their shares and investors should also be free to decide the price that they want to pay.
Poudel said the provision of offering shares at the face value discouraged many good profit making companies to enter the capital market. The measure leads many investors to believe that public offers represent a one-way bet to profit and that they may make unwise decisions.
Regarding promoters’ shares, the plan proposes that promoters’ shares must be interchangeable with other shares. “The minimum promoters’ holding should be reduced to 20 percent with a lock-in period of three years, but promoters should be allowed to trade freely thereafter,” it suggests.
“Insisting promoters to retain 51 percent of the equity puts public investors in minority,” states the proposed plan. “Minority shareholders can be vulnerable to abuse by majority shareholders.” It says that creating a distinction between promoters’ shares and public shares restricts liquidity further.
Recommendations
*Removal of the compulsory provision for BFIs to issue pubic shares so as to ensure better participation of the public in the secondary market.
*Removal of the provision of public shares issuance at face value of Rs 100 per share.
* Reduction of the promotors’ shareholding to 20 percent from 51 percent.
Source: Kantipur
Stating that the current provision that forces banks and financial institutions (BFIs) to offer public shares distorted the capital market, a five-year master plan prepared by the Securities Board of Nepal (Sebon) has suggested that BFIs should not be forced to make public offers.
“They (BFIs) should be free like other businesses to raise finance as per their requirement,” states the master plan prepared with the assistance of the World Bank which has been floated for pubic discussion. As per the Bank and Financial Institution Act, BFIs are compulsorily required to offer at least 30 percent stake for the public within two years of acquiring license. Now, the central bank has allowed them to increase it to 49 percent.
The plan says that such a provision has brought distortion in the capital market resulting in dominance of the financial sector. The number of listed non-financial companies is just over 30. “The provision leads to oversubscription and investors tend to borrow loans for purchasing the subscriptions in the primary market instead of involving in the secondary market where trading is very thin,” it says. “The provision restricts the extent of public participation anyway.”
Forcing a company to make public offers limits the benefit only to those who happen, by good fortune, wealth, or otherwise, to acquire shares, says the plan. It says there is no reason why the public should have any better right to participate in the profits of banks than those of any other company. “Forcing a company to make public offer raises the cost of capital,” it says.
Nepal Rastra Bank (NRB) officials, however, say the suggestions of the master plan were not based on the ground reality. “The provision of compulsory public issue was made to enhance public scrutiny as BFIs use public deposits,” said Bhaskarmani Gyawali, spokesperson for NRB. “BFIS and other companies cannot be put into the same basket.”
However, Sebon Chairman Subir Poudel said forcing BFIs to go public will not guarantee the safety of public deposits. “It is the duty of the state and the central bank to ensure the safety of public deposits in BFIs licensed by NRB,” he said.
Similar was the view of Ashoke Rana, president of Nepal Bankers’ Association. “The participation of two public directors in banks’ board for 30 percent public stake does not guarantee public scrutiny,” he said, citing recent cases of banking frauds committed by promoters of some listed FIs.
The proposed master plan has stated that besides the compulsory provision of public issuance, the rules on pricing—such as public offers should be made at face value of Rs 100 per share regardless of the market value—and provision of promoters requiring to retain at least 51 percent shares in BFIs have distorted the capital market. “These provisions must be removed to rebalance the supply of securities by attracting more companies to the market,” it states.
The plan suggests that those willing to come into the capital market should be allowed to fix the value of their shares and investors should also be free to decide the price that they want to pay.
Poudel said the provision of offering shares at the face value discouraged many good profit making companies to enter the capital market. The measure leads many investors to believe that public offers represent a one-way bet to profit and that they may make unwise decisions.
Regarding promoters’ shares, the plan proposes that promoters’ shares must be interchangeable with other shares. “The minimum promoters’ holding should be reduced to 20 percent with a lock-in period of three years, but promoters should be allowed to trade freely thereafter,” it suggests.
“Insisting promoters to retain 51 percent of the equity puts public investors in minority,” states the proposed plan. “Minority shareholders can be vulnerable to abuse by majority shareholders.” It says that creating a distinction between promoters’ shares and public shares restricts liquidity further.
Recommendations
*Removal of the compulsory provision for BFIs to issue pubic shares so as to ensure better participation of the public in the secondary market.
*Removal of the provision of public shares issuance at face value of Rs 100 per share.
* Reduction of the promotors’ shareholding to 20 percent from 51 percent.
Source: Kantipur
