As the index continues to fall, price of many scrips goes below auction cutoff; what is our learning?

Mon, Dec 3, 2018 6:35 PM on Auction, Exclusive, Stock Market,

Aakriti Thakali

Last year will be marked in the history of Nepal Stock Exchange (NEPSE) as the year when it got flooded with oversupply of shares, but the demand didn't reciprocate. The supply had increased significantly after the regulatory bodies increased the paid-up capital of the listed companies. The two regulators, Nepal Rastra Bank (NRB) and Beema Samiti had increased the minimum capital requirement of the banks, finance companies and insurance companies in the following manner.

The NRB's goal behind the capital hike was to consolidate the number of financial institutions, which apparently was very high given the size of our economy. All of the institutions have met the minimum requirement, and the NRB's goal materialized only partially. Although mergers and acquisitions were emphasized, many resorted to meeting their capital either through bonus shares or through the issuance of right shares. Hence, the supply sky rocketed.

The market's law of demand and supply is simple, and the point where they meet gives us the equilibrium. In case of a stock market, the meeting point of demand and supply of shares gives us the price of the share. The bonus shares is given from the earnings and reserves of the company to the shareholders as return to their investment. So there is no issue there.

However, in case of right shares the shares aren't just given to the shareholders, rather they need to buy it at a nominal price (The benefit is the right share's price is below the market price of the share and by exercising the right the shareholders will be able to maintain their proportionate ownership of the company). So when a lot of companies were giving right shares, investors were short of cash and the issue went undersubscribed. Then, the unsubscribed shares were floated for general public in an auction.

The reason why investors bid in an auction is because they can get the shares at a lower price, and can sell in NEPSE at market price and earn some money. However, as the market keeps on falling, a lot of companies' share prices have gone below the auction cutoff price. That means a lot of investors who bought in an auction are in loss right now. In order to see if this is true, we've prepared a list of auctions that have happened from the start of year 2018 till now.

In the above table, the closing price denotes the price of the company's share on the day when auction was closed. Similarly, the cutoff price denotes the base price of the auction. So everyone who had placed their bid on or above the cutoff price will get the applied number of shares. The last trading price is the price of the share on Mangsir 13, 2075. Since some of the companies had issued bonus and right shares it would be unfair to directly compare cutoff with the Last trading price.

Therefore, the companies who have issued bonus and right shares after the closing of auction (i.e. if their book closure is after the closing date mentioned above), then they have been included and necessary adjustments have been made to the Last Trading Price. Pokhara Finance and Shree Investment Finance have had two book closures for bonus dividend after the auction had been closed. So the total figure is kept in the table.

Upon comparison, we can see that a lot of company's share price has fallen below the LTP as denoted by the red shaded box. Even after the adjustments from bonus and right shares, not much changes is seen. The LTP of only three scrips – Central Finance, Pokhara Finance and Jebils Finance – have risen above the cutoff.

However, cutoff is the base price (cheapest price) and the other bidders have bought the same shares for even higher amount, which brings us to see how much they are in loss right now. In addition, you can see the number of shares auctioned in the third columns. The higher the number of auction units, the higher the loss amount.

If we see Prime Life Insurance Company (PLIC), it had auctioned 2.71 lakh units and the cutoff was Rs 621.51, whereas the current LTP is Rs 409. So even if we assume that all the bidders got the shares at Rs 621.51 then they are collectively at a loss of Rs 5.78 crore, which means in reality the loss in even higher than this.


The point of this article is not to point out how much someone has lost but to show how wrong we were about secondary market. Basically we, as investors, jump at the chance of applying for an IPO and auction with hopes of definite return. This might have been true when the market was bull, but there's no certainty if the same thing is going to happen in a bear market.

We have already seen how the auction bidders have ended up in loss. Similarly in case of an IPO, we can see many hydropower companies and others whose share prices have gone below Rs 100. Some examples are National Hydro Power Company (NHPC), Jebils Finance Company (JEFL), Khani Khola Hydropower Company (KKHC) and Synergy Power Development (SPDL).

So, our learning here is that even if we refrain from investing in secondary market thinking that it's risky, doesn't make IPO and auction risk-free. A while back, yes, it was difficult participating in secondary market, but today that has changed. We have online trading system, which isn’t perfect, but is good enough to start with. We can urge the NEPSE to improve the system and hopefully this will be a great platform in the days to come. Similarly we have eDIS in Mero Share for settlement and clearing.

Thus, it's time for us to come out of our shells and explore deeper water.