Private Limited Companies' Transition to Public Entities Enables IPO Authorization

As soon as the private limited company undergoes conversion into a public entity, it will gain the authorization to launch an initial public offering (IPO).

During Tuesday's cabinet meeting, the Securities Registration and Issuance (Seventh Amendment) Regulations of 2080 were approved. This endorsement included the implementation of novel provisions within the capital market. Corresponding regulations were revised in accordance with the suggestions of the Securities Board of Nepal (SEBON).

Concurrently, the requirement for a two-year interval after the company's transformation for IPO issuance has been rescinded. With the revised regulations, companies registered as private entities and operating for a minimum of 2 years will be eligible to carry out a public issue (IPO) as soon as they convert into public companies.

According to the modified regulations, in cases where a company has been registered as a private limited entity, completed a minimum of two fiscal years of operation, and has transitioned into a public limited company, the obligation to undergo a full fiscal year as a public company has been eliminated.

Previously, only a company that had fulfilled a one-year period as a public entity by conducting necessary business operations aligned with its objectives could proceed with going public.

Furthermore, as part of the regulatory revision, companies with a business operational history of only 10 years are now prohibited from issuing IPOs. The addition of Rule 3 and Sub-rule 3 to the regulation states that companies with operational periods under 10 years cannot apply for securities registration and public issuance through the Securities Board.

The recent amendment has also brought changes to IPO issuance at a premium.

Banks, financial institutions, and organizations possessing a paid-up capital of at least one billion rupees, licensed by regulatory bodies in the insurance sector, are now permitted to issue IPOs at a premium within a year. Previously, the requirement was for organizations to operate profitably for at least three years before being eligible for an IPO at a premium.

Likewise, for manufacturing industries, an IPO can be issued at a premium subsequent to calculating profits from two fiscal years. Industries of this nature should have a capital exceeding one billion rupees.

In the case of other companies with a capital below one billion rupees, a provision has been established for issuing an IPO at a premium, considering profits from the prior three fiscal years. If a company wishes to launch an IPO at par value, this can be done as soon as it transitions into a public entity.

Formerly, the stipulation was that only companies exhibiting three consecutive years of continuous profitability could issue IPOs at a premium.

With the objective of heightening involvement of real sector companies in the capital market and expanding public access to profitable industries, the government has introduced these relaxed provisions. Prime Minister Pushpa Kamal Dahal spearheaded this regulatory amendment.

Until now, only around 250 companies have secured listings in the capital market.

Encouragement for companies comes from two successive years of profitability and the listing of reputable companies via public offerings. The arrangement allowing IPO issuance at a premium after two consecutive years of profitability, and in adherence to board-set criteria, presents a promising opportunity for investors.

Although real sector companies have recently emerged, the presence of both loss-making and prosperous companies is evident. Investors express a desire for esteemed companies to surface, regardless of whether they are premium or not. The amended regulations will certainly incentivize reputable companies to pursue listings.

While the board should be cautious about potential subpar companies entering the market when arranging IPOs for companies transitioning from private to public, enabling immediate IPO issuance upon going public isn't inherently flawed. Nonetheless, companies showcasing negative net worth and unfavorable conditions should be precluded from going public, as it would undermine the securities market.

Investors are prepared to pay a premium for quality but seek robust companies.

Private equity, venture capital, and hedge funds can now divest founder shares within a year.

Adjustments have been incorporated in the regulations to facilitate the sale of shares by private equity, venture capital, and hedge funds. A stipulation previously mandated that shares, other than those issued to the public after the prospectus is published, could not be sold to the general public within three years from the distribution of primary shares. However, the revised Securities Registration and Issuance Regulations decree that private equity funds, venture capital, and hedge funds can now divest shares within one year.

"Private equity funds, venture capital, hedge funds, or similar funds, registered either domestically or abroad, or securities held by organizations authorized to invest in Nepal by foreign governments, may issue primary shares to the general public within one year from the share allocation date. Subsequent to this period, selling said shares becomes permissible," states the amended regulation.

Conversely, other founding investors are prohibited from selling shares for three years.

The gateway to green bonds is now open.

The Council of Ministers ratified the Securities Registration and Issuance (Seventh Amendment) Regulation of 2080 on Tuesday, effectively clearing the path for the issuance of green bonds. The revised regulation notes, "Established organizations can issue green bonds, or other bonds or debentures of a similar nature, post the board's approval." Furthermore, provisions concerning registration and issuance of such bonds and debentures will adhere to the prescribed guidelines. Foreign investors can also participate in these bonds, subject to Nepal's legal framework."