The unsubscribed FPOs: Whom do we blame?

What could be more daunting than the fact that public offering of “A” class categorized commercial banks gets unsubscribed? If we look into this in a surficial level, it brings us to two major conclusions: Investors are not interested in the issued offer or the performance of the banks are not appealing to public. But, is it the real picture?

When it comes to NMB Bank, the bank has been giving a consistent growth in terms of net profit, deposits, loan portfolio, EPS and reserves. The basic indicators of the bank is quite commendable for any investors to show interest in this commercial bank. Yet, the bank’s FPO offered to meet the paid up capital requirement has remained unsubscribed since last 19 days. If we consider NBL’s performance, we cannot over look its problem with Non-performing loan in the past years yet, we cannot undermine the improvement the bank has made in the recent days. However, even this state owned bank’s public offering are not being subscribed in a smooth pace. So, despite positive aspects, why are the investor not interested in these public offerings?

If we rewind our days to the past years, we are quite familiar with the headlines that read out “One more FPO shares oversubscribed by 11.75 times! Who gets how much?” These headlines are the representation of commercial banks such as Standard Chartered Bank, Nepal Investment Bank and insurance companies like Nepal life Insurance Company, Shikhar Insurance Company. All these banks and insurance companies are notable names in the finance industry just like NMB and NBL. Yet, the market has changed! So, whom do we blame?

Do we blame the government?

The government that people elects are expected to satisfy every sector of the nation. But with the recently elected communism party, it is of no surprise, the market took a downturn. Reason: a communist party’s manifesto does not usually prioritize secondary market. We have seen the capital gain tax being raised by the government but we have also seen the directives for private sector to go into secondary market by the government. We have observed the capital gain tax on bonus and right shares but we have also observed government backing out from the same decision. Moreover, FPO issuance is concerned with the primary market rather than secondary. So, do we blame the government?

Do we blame the banks?

The monetary policy of fiscal year 2072/73 directed banks to meet the paid up capital requirement of Rs 8 arba. NMB and NBL issued its FPO almost at the end of fiscal year 2074/75. It means these banks waited two years to implement their capital plan. So, are these banks that we blame? Probably not! If we look on the other side, the regulatory processing that commercial banks are to meet does not get accomplished within a fortnight. When it comes to NMB and NBL, NMB has a joint venture with foreign bank and NBL is a state owned enterprise. So, it is of no wonder, the regulatory process would have been tedious and time consuming. So, do we blame the banks?

Do we blame the regulators?

SEBON is solely responsible for approval of public offerings of the banks. Throughout these processes, SEBON is often criticized for its decision. The decision is usually for the premium priced FPOs approval. Eg: BPCL. When it comes to NMB and NBL, SEBON as a regulatory body has taken much time and study of these banks. We can expect a regulatory body to be prompt in terms of decision making yet we cannot expect it to compromise its evaluation to shorten the time. So, do we blame the regulator?

Do we blame the policy?

Why are banks issuing FPOs in the first place? The sole objective of issuing these FPOs is to meet the paid up capital requirement of Rs 8 arba. The 8 arba decision was undertaken by Dr. Chiranjivi Nepal; governor of Nepal Rastra Bank that is supposed to be for a good reason. The major reason is said to be a stronger foundation of commercial banks. Undoubtedly, there are banks who have gone through major mergers and are even in the process of merging despite meeting paid up capital requirement for a stronger foundation. So, do we blame the policy?

Do we blame the price?

Are the offered prices of these shares expensive? A half portion of the investors will agree on to this. “The prices are expensive compared to the market price”- a statement overheard very often these days. Particularly, we can’t deny the statement but, who really knew about the market sentiments when fixing these price? The underwriters? SEBON? The board? The management? Who? Moreover, we also can’t deny the prices of FPOs are often fixed with an established formula with respect to net worth per share, net profit os the company, discounted cash flow, and average market price of the company in the last 180 days. For NMB, SEBON had set price of almost Rs 500 yet looking at the market circumstances the bank lowered its FPO's price for the benefit of the investors.

Is it only the market price we are supposed to compare when we consider over and underpricing of public offering? What about the other similar big companies that have issued FPOs at premium in the past?

SCB issued FPO at a price of Rs 1290 which was oversubscribed by 11.57 times, NLIC issued FPO at a price of Rs 1425 which was oversubscribed by 11.76 times, NIB issued FPO at a price of Rs 601 which was oversubscribed by 11.75 times and SICL offered its FPO at a price of Rs 650 yet oversubscribed by 12 times. All these price rates are comparatively higher than NMB’s FPO price of Rs 333 and NBL’s FPO price of Rs 280. Yet, the shares are short by 34% and 93% as of yesterday. So, do we really blame the price?

Do we blame the investors?

Retail and institutional investors are in the market to maximize their wealth. In this process, they can develop two major strategies, long term and short term. In a bullish market, investors prefer going short term while in a bearish market, investors prefer going long term. We cannot impose investors to choose their investment strategy. But, yet the undersubscription of the FPOs shows that investors are not ready to wait for a long period of time by applying into FPOs. So, are we to blame the investors? Definitely not! Because, they have their own right for investment choice.

While we are all here blaming one another on the undersubscription of FPOs, it’s probably a change- a new movement, a new strategy or a new way for the market. Hence, it’s probably not a blame game but rather a change. These events signal how fast market sentiment changes within a blink of eyes and how preference of investors can change.

No matter how much we try to avoid the blame game, it always ends with one question: Given that a consistent number of public offerings are going undersubscribed, is it high time for the concerned authority to intervene?