Guideline for underwriters soon

KATHMANDU, MAY 28: 

The capital market regulator is giving final touches to the Underwriting Guidelines that will spell out the provisions for offloading shares in underwriters’ possession. 

Securities Board of Nepal (Sebon), which was framing the guideline to provide functional clarity to the underwriters, is discussing the final draft before seeking external opinion, according to deputy director at Sebon Muktinath Shrestha. The guideline will specifically spell out the provisions to offload the shares which underwriters have to purchase when an issue is unsubscribed. 

Underwriters are the merchant bankers that guarantee to buy unsold shares when an issue is offered for sale to the public. If the issue goes unsubscribed, the underwriter has to buy the unsold amount to ensure the public offering gets a minimum rate of subscription. 

At present, there are not many details mentioned in the regulation regarding the undertakings of the underwriters. The guideline is supposed to bring functional clarity to the undertakings of the underwriters.

The Securities Businessperson (Merchant Banker) Regulation 2064, which governs underwriters, does not have any provision explaining how long the underwriters can keep the shares purchased and the exit mechanism. At present, there are seven merchant bankers that have licence to work as underwriters.

“Nothing has been mentioned in the current regulation because earlier initial public offerings (IPO) used to get oversubscribed and the need for underwriters to purchase the shares never arose,” pointed out president of Merchant Bankers Association of Nepal Bhishma Raj Chalise. 

Though the primary market has been warming of late, the fizzled out secondary market had pulled IPO subscription into hard times. In August, Bhargav Bikas Bank’s IPO worth Rs 4 million did not get subscribed compelling its underwriter, NMB Capital, to purchase the shares. 

Likewise, in January, Bagmati Development Bank’s IPO met a similar fate. Even after one month of opening of the IPO, it shares did not get fully subscribed and the underwriter, Civil Capital, had to purchase the unsubscribed shares. 

“Previously, underwriting used to only be a formality for issuers but now they have become an obligation to ensure the shares are sold,” pointed out Chalise, who is also chief executive of Civil Capital.

Underwriters are seeking to unload the shares through the share market as both financial institutions have got listed at Nepse. The absence of regulations regarding offloading of such shares has created a problem of crossholding as most merchant bankers are subsidiary arms of financial institutions. 

Since most merchant bankers are the subsidiary arms of financial institutions, crossholding of stakes is going to be a problem if underwriters hang on to unsubscribed shares of other financial institutions. 

NRB does not allow one financial institution to hold more than one per cent of shares in another and the guideline has to frame a regulation that does not violate this provision.

Source: THT